Affin Bank’s share price is up 35% year to date. While it remains a relatively cheap stock considering it is trading at approximately 0.6 times its book value, the recent uptick is likely driven by Sarawak's entry into the stock and the potential strategic implications of this development. — MUHAMAD SHAHRIL ROSLI/The Star
THAT it is taking some time for Sarawak to conclude its purchase of a big stake in Affin Bank Bhd is a positive sign that due process is being adhered to.
The world over, one of the most strictly regulated segments of business is banking, simply because banks will always be the artery of the economy. Banks are often described as such, stemming from their crucial role in facilitating financial transactions, providing credit and supporting economic growth.
Central banks are meant to ensure the stability of countries’ financial systems and this is why they need to closely monitor banks. One bank’s collapse can cause systemic risks that could lead to financial crises.
That is not to say that Sarawak’s entry necessarily poses any obvious risks.
The point is, changes in shareholdings in financial institutions need to be scrutinised sufficiently by the central bank, which also has to ensure that the necessary safeguards are put in place.
Malaysia has a colourful banking history. Just like many other countries, banking regulations were more loose in the old days. As a result, licences were more easily obtainable, resulting in the mushrooming of banks.
Some of those banks were on the brink of collapse following the Asian financial crisis, which then led to a massive banking sector consolidation in Malaysia. Capital adequacy ratios were beefed up, non-performing loans were written off and shareholdings were institutionalised where possible.
During that consolidation period, a few Sarawak-owned banks were swallowed up into the consolidation of larger banks, mainly operating out of Peninsular Malaysia.
But in 2001, Sarawak, then under the leadership of the late Sarawak Governor Tun Abdul Taib Mahmud, acquired a controlling interest in RHB Bank Bhd.
The investment was done by Cahya Mata Sarawak Bhd
(CMS), which, although acting as the investment arm of the Sarawak state, was also controlled by Taib’s family. However, the Taib family later exited RHB Bank due to restrictions imposed by Bank Negara Malaysia on their influence over the bank’s management.
Fast forward to today and the argument is that it is different this time.
Under the leadership of the esteemed Sarawak Premier Tan Sri Abang Johari Abang Openg, the state is seeking to run things more professionally.
Sarawak seems determined to acquire a bigger stake in Affin Bank than the 4.8% it already has.
On Friday, Sarawak inked an MoU with Affin Bank’s largest shareholder, the Armed Forces Fund Board (LTAT), to collaborate on multiple levels of business in the future but also for the state to buy more shares in the lender from LTAT.
Earlier, Abang Johari had said that the state’s takeover of the commercial bank will be sealed on July 19. On Friday, he said that the share acquisition will go ahead once all the necessary regulatory approvals are secured.
It is understood that Sarawak will need to comply with conditions set by Bank Negara, which include ensuring that the bank maintains its independence and does not fall under the complete control of the state. This could take the form of restrictions on voting rights attached to Sarawak’s stake.
Reports have said that Sarawak is looking to grow its stake in Affin Bank to around 30%. This, however, could be a deal breaker as why would a party buy a controlling stake in an entity without the ability to steer it?
But going by the Premier’s speech on Friday, walking away from the deal is unlikely. Sarawak wants to grow Affin Bank to tap into the vast opportunities it offers, from accessing the underbanked people and companies to helping the bank embrace its ESG targets by increasing its exposure to the green economy in the state.
Assuming that the deal goes through, how will it change the fortunes of Affin Bank?
Drawing from insights provided by research analysts, the deal will only be mildly positive.
“Although the Sarawak story has merits, it does not lead to automatic success,” points out Hong Leong Investment Bank Research analyst Chan Jit Hoong in a recent report.
In March, Affin Bank was slapped with a slew of sell calls after its net profit for the year ended Dec 31, 2023 (FY2023) tumbled 66% to RM402.19mil from RM1.18bil a year ago. Net profits for Q1 FY2024 also didn’t impress analysts as the figure was lower by 26% year-on-year.
The weaker performance was attributed to lower net interest income and higher overhead expenses. No wonder that going by Bloomberg data, there are currently six sell calls, two hold calls and only one buy call on Affin Bank.
Notwithstanding that, Affin Bank’s share price is up 35% year to date. While it remains a relatively cheap stock considering it trades at only around 0.6 times its book value, the recent uptick is likely to do more with Sarawak’s entry into the stock and the possible machinations that could result from that.
That, however, is left to be seen and this is why Hong Leong’s Chan, in his recent report following the rise in Affin Bank’s share price, advised: “We advocate to capitalise on this positive wave and lock-in some profits.”
This article first appeared in Star Biz7 weekly edition.
