EON Capital's Fortunes In The Coming Weeks

Business Times, SINGAPORE, Jan 5 — Doubts are surfacing over a possible merger between Hong Leong Bank and EON Bank that would create Malaysia’s fourth-largest bank with assets of RM110.5 billion.

In late December, Hong Leong Bank, which is controlled by the reclusive tycoon Quek Leng Chan, told the stock exchange that it had received Bank Negara Malaysia’s permission to start negotiations with “certain shareholders” of EON Capital to acquire an interest in its smaller rival.

Listed EON Capital wholly owns EON Bank. EON Capital’s largest shareholders are businessman Rin Kei Mei and Sarawak billionaire Tiong Hiew Khiing, who collectively hold 33.2 per cent of the financial firm. Other shareholders include Hong Kong-based investment fund Primus Pacific Partners (20.2 per cent), the Employees Provident Fund (12.1 per cent) and state investment agency Khazanah Nasional (10 per cent).

The sticking point could be price. Local news reports, citing sources, have said that Quek would be willing to pay between RM5.50 and RM6 per EON Capital share, which would value the bank at one-1.2 times book.

“A previous attempt several years ago stalled over pricing: Mr Quek is not known to pay more than what he considers fair.’

But officials familiar with Rin and Tiong said that they would expect at least RM8-8.20 a share, which would value the bank at almost 1.6 times book. There is no certainty that a deal will be struck, as this is not the first time Hong Leong Bank has eyed EON Capital. A previous attempt several years ago stalled over pricing: Quek is not known to pay more than what he considers fair.

So far, nothing has happened as Quek is said to be abroad. The Star newspaper, citing sources, said yesterday that the Employees Provident Fund and Khazanah are ‘believed’ to have exited from EON Capital. But a government official denied this.

“We haven’t received any offer so far,” he told BT.

It is also not clear where Primus would stand. Three years ago, the investment fund bought into EON Capital for a hefty RM9.55 apiece – a price Quek would probably consider astronomical. And the opposite could be said about Quek’s speculated buying price — RM5.50-6 — as far as Primus is concerned. Indeed, there is talk that Primus is approaching other funds to make a rival bid for EON Capital. According to The Star, the fund approached Singapore’s Temasek Holdings.

In theory, this makes sense. Temasek manages Malaysia’s smallest bank, Alliance, so aligning with Primus could pave the ground for an ultimate merger between EON Bank and Alliance Bank. But the Singapore investment agency has not commented publicly on The Star’s story.

What is clear is that Malaysia’s central bank would encourage a merger. Indeed, the move towards a possible merger reflects Bank Negara’s wish to winnow the Malaysian banking sector to a few large banks, to better withstand increased foreign competition starting this year. Malaysia now has eight local banks. — Business Times Singapore

My Take: The local media seems to be a lot more excited and certain that the deal will go through. My view is that Quek wants this deal as it seems that he will NOT be able to get the Public Bank under his wings - pricing for PBB and the size may have been the obstacles to getting PBB (please read my posting on CIMB-PBB).

http://malaysiafinance.blogspot.com/2009/12/my-prediction-for-1-biz-news-in-2010.html

Quek cannot afford not to buy another bank as that would mean some other bank getting a lot bigger when the dust settles. I do agree its a matter of pricing. If its below RM6.00 as the article above stated, I am very sure the owners would not sell. Its a sellers' market, not a buyers' market.

The angle which many have not paid sufficient attention to is the Primus block, which had a high entry price. I am certain they would have approached Temasek, which controls AFG (Alliance Bank). Please read my posting on AFG to get a grasp on their side of things.

http://malaysiafinance.blogspot.com/2009/12/whats-up-with-afg.html

Hence it is clear that Bank Negara would NOT want a sovereign wealth fund to be owning a Malaysian bank. It looks increasingly likely that DBS Bank will be asked to take over the stake, as its the only Singapore bank that still do not have a banking presence in Malaysia. Would Bank Negara frown on that? Not really as both sides are opening up.

Would Bank Negara frown on DBS Bank taking over AFG and bidding for EON Cap at the same time? I really don't think so. If indeed DBS Bank is taking over AFG, then it would also make sense to bid for EON Cap - not that they really need to. Of course DBS Bank could come in and bid for EON Cap first before swallowing AFG. I doubt very much that Temasek will be allowed to bid for EON Cap as I am certain Bank Negara do not want that to happen when they are trying to get Temasek to divest AFG.

If DBS Bank gets approval, watch EON Cap fly. Quek can wait for a better price but he cannot afford to wait till DBS Bank or some other bidder comes into the fray, and end up engaging in a price war. On balance of the above, I think Quek will try and make a deal soon, closer to RM8 and not closer to RM6.

Just my dua sen...


p/s photos: Devon Aoki

Bank Negara's Monetary Policy

After cutting rates by 1.5% during November 2008-March 2009, Bank Negara has kept interest rates unchanged starting Q2 2009. Since cutting rates too low has its risks , the central bank has focused more on improving "credit access" in the economy. Deflationary pressures, large output gap, low resource utilization and a sluggish recovery will help the central bank to remain on hold until sometime in 2010. But deflationary pressures might ease in H2 2009 due to commodity prices and fading base effects of 2008, preventing further rate cuts.

Will Bank Negara Remain on Hold for Now?

• October 28, 2009: Bank Negara maintained the interest rate unchanged for the fifth consecutive month at 2.0% to support economic recovery since price pressure are still low.
• BNM October Monetary Policy Statement: The current monetary policy is “appropriate” and will “support” economic activity as domestic economic conditions are improving with policy support, and inflation and inflation expectations are expected to remain “contained” in the coming months. BNM sees strong improvement in the labor market, domestic demand, financing activity and external trade, and these developments are expected to continue into 2010. Without any unexpected external impact, inflation in 2010 will turn positive, but remain “subdued”.
  
• BNM sees limited impact of low interest rates and the risk of fueling asset bubbles. It is rather focusing on credit measures to improve liquidity in the financial system. Fiscal stimulus, past interest rate cuts and government and central bank credit measures are improving credit flow in the economy (especially for smaller firms) and slowing the pace of job losses.
• The contraction in manufacturing activity and exports has eased since June 2009. The pace of economic contraction has eased since Q2 2009.
  
• The recovery is expected to be very sluggish due to slow recovery of exports and foreign investment inflows. Excess capacity and large output gap will persist through 2009 and most of 2010. This might lead the central bank to keep interest rates on hold for a long time and be one of the last central banks in Emerging Asia to raise rates.
• But BNM would remain vigilant about rising oil and commodity prices during the global recovery, especially as the base effects of 2008 food and oil prices start fading in Q3 2009. Going forward, improvement in private demand, lag impact of fiscal stimulus and liquidity impact of portfolio inflows might reduce deflationary pressures.
  
• However, further rate cuts are not expected. Low rates pose risk of capital outflows and downward pressure on currency amid declining interest rate differential with other Asian countries and the U.S.. This is exacerbated by risks to the debt ratings. Currency has showed some gains from April 2009 since when the rates have to kept on hold.
• Analyst Wei Zheng Kit, Citigroup: The central bank will not increase interest rates until H1 2010. BNM might be the last central bank to tighten the monetary policy in Asia.
  
• Economist Vishnu Varathan, Forecast Singapore: Since economic recovery in Southeast Asian countries is weaker than India and South Korea, Malaysia will not hike interest rates earlier than these two countries.
• Analyst Tetsuji Sano, Nomura: If global oil prices continue to increase, the government may hike domestic gasoline prices. On a year-on-year basis, the CPI will continue to remain in negative territory. The central bank is expected to keep current key rate unchanged at least until Q1 2010 as economic recovery is still "nascent". Even after the central bank begins to increase interest rate, the real interest rate will stay below zero if the CPI remains around 2.3% in 2010 and 3.3% in 2011.
• EIU: Malaysia is in a mild and short-lived deflation owing to falling global oil and non-oil commodity prices and base effects of 2008. However, the central bank will keep interest rates at around 2% for the rest of 2009 and probably until H1 2010.
• Morgan Stanley: Deflation will continue until the end of 2009. The central bank will start raising interest rates in H2 2010.

Are Deflationary Pressures in Malaysia Fading?

• The Consumer Price Index (CPI) declined 2% y/y in September 2009 for the fourth straight month of deflation after falling 2.4% in August 2009 and 2.4% in July 2009 due to relatively lower petrol and diesel prices. Yet, the pace of deflation has been slower led by the moderation of the decline in transport and food, clothing and food wear prices. On a month-on-month basis, CPI increased to 0.3% m/m in September 2009 after rising 0.2% m/m in August 2009. (Department of Statistics Malaysia, 10/23/09)
• Deflationary pressures are due to high base effects of Q2 2008, decline in food and oil prices relative to 2008, government subsidies for flour, sugar and bread.
• Deflation will persist due to output gap, excess capacity in manufacturing and rising unemployment. Sluggish recovery in 2010 implies that inflation will remain low until early 2010.
• A risk is that the base effects of 2008 will start fading by Q3 2009 and might raise inflationary pressures due to recent increase in oil and commodity prices.
• Inflation peaked in Q3 2008 at 8.4% y/y on high food and fuel prices and electricity tariffs.
• BNM: Inflation and inflation expectations are expected to remain “contained”. Without any unexpected external impact, inflation in 2010 will turn positive, but remain “subdued”.
  
• Analyst Wei Zheng Kit, Citigroup: Deflation has bottomed in August 2009 and positive momentum will continue to increase CPI. A year-on-year CPI may enter positive territory in 2009, but the central bank will hold interest rate unchanged in October 2009.
• Economist Intelligent Unit: Inflation will stay in slightly negative territory in H2 2009 due to the decline in global oil and non-oil commodity prices and base effects from 2008. However, lower global commodity prices are positive for growth, which could strengthen domestic demand. Inflation will pick up in 2010 as global commodity prices increase.

p/s photos: Li Xiao Lu

On Bank Negara, PPP & The Ringgit

hishamh said...

A couple of problems here. Purchasing Power Parity (PPP) is no more than an academic curiosity these days, for the simple reason that it doesn't remotely describe currency movements even between advanced economies, much less for emerging markets. So there is no firm foundation for using it as a basis for evaluating currency misalignments.

It therefore follows that analysing currency policy based on PPP values is also a red herring.

In fact, based on current theories, it's possible to argue that the causality runs the other way from your analysis - an export-oriented strategy results in low relative incomes and a depressed exchange rate, rather than a weak currency being used to support export competitiveness. Which means that the MYR exchange rate is in fact market-determined, and there is no deliberate central bank policy to weaken the currency.

3:14 PM

hisham,

You make a few good points... herein lies the 64,000 dollar question... is Bank Negara deliberately suppressing the ringgit?

Considering that the ringgit is tightly controlled, and is not totally freely exchangeable overseas, BN exerts a lot of control over the ringgit. What I mean is that no hedge fund or trade would seriously dare to bet against BN's persuasions, they would rather bet alongside with BN's persuasions. When the currency is "limited" in its free trade and its circulation, that is tantamount to controlling the currency - not that that is a bad thing. For a small open economy like ours, we cannot seriously have a totally free floating currency, how do you think our exporters and services sector going to adjust if in January the ringgit is 3.6 to the USD and in May its 4.1 but by October its 3.1.

I am more concerned in the usage of the ringgit to shape the industries we have over the longer term. Yes, short term, fighting inflation is priority number one followed by maintaining a sustainable economy. But just look at where the ringgit has been over the past 20 years. I remember it was 2.7. What that tells me is that we are deliberately attracting FDI via such a mechanism.

The ringgit should be managed, but manged to appreciate so that we can flush out those industries that should not be here. We need to move up the value curve. Ifwe have an internal target of 3.2 average for 2010, 3.0 average by 2011 and 2.8 average by 2012, believe you me, we will see some industries being taken out naturally or indrectly. The kind of FDI we attract will be different for sure. We have the resources, don't short change ourselves, don't keep adding low cost foreign workers, it makes the substantial bottom rung of the industries stay manual and low value add.Yes, its easier said than done as industries will be displaced, jobs will be lost... in other words this is exactly the structural unemployment that we need to go through. Its tough, business wise and politically, but being in positions of leadership, we must make tough decisions or else we will lock ourselves into the same sandstorm. It is very sad to see the same sunset industries still operating in Malaysia 5 or 10 years from now.

... Oh, you want to do large scale manual soldering... go to Malaysia, there got plenty of cheap labour... Even if we keep bringing these labour intensive FDI, the best jobs that Malaysians can hope for is factory manager of a labour intensive factory looking after foreign workers. Get the ringgit to where our resources should be, and not cater and pander to the lowest common denominator.


p/s photo: Miwa Cocoa

Got A Question For Bank Negara

Dear Madam Zeti,


There is a curious trend in bank lending which I am sure you are aware of, but is troubling to me. I am sure you are aware that all property loans (or almost all property loans) given out by Malaysian banks have a 5 year lock in period. During that 5 year period if you want to refinance your loan by the same bank or take it to be refinanced to another bank, you will be whacked with a 5% penalty on outstanding amount.

Say you bought a house in 2006 for RM500,000 with a RM400,000 loan with rate of 6%. Naturally with rates coming down over the last 12 months, you should refinance the balance, but you cannot.

Is this ruling fair to property owners? Is this rule sanctioned and encouraged by Bank Negara as it obviously benefits the banks at the expense of the borrowers. Is this to stop other banks from "stealing" loans from one another? If it is, then banks SHOULD allow for refinancing inhouse with no penalty - why should borrowers not have that choice?

As the country tries to deflect a recession, interest rates come down as a monetary tool by Bank Negara. What good is the tool, what good is the lower rates if a substantial portion of the loans are "locked in", unable to take advantage of the lower rates? This neutralises the lower interest rates policies as property loans make up a huge portion of most households' balance sheet.

Why are local banks having it so good? Why can't the public be beneficiaries of better and more open competition among the banks? A borrower will go to a bank because of the service it provides. Why does that "better service" automatically goes out the door the moment you sign off on the loan? Why can't a person switch to a lower cost option two or three years down the road? If a bank loses a loan to another bank, it means the other bank can compete more effectively - i.e. lower cost of funds.

The local banks are acting like a cartel... they all agree to do this so that all can enjoy supernormal profits, lock in profits, all to the detriment of the consumer. No need to watch The Sopranos, we have the local banks.

I can understand a window of a lock in period for the banks to recoup some marketing cost, but certainly not 5% penalty.

Bank Negara should:
a) reduce the lock in period from 5 years to 2 years
b) reduce the penalty from 5% to 2%

This is one of the many big reasons why Malaysian properties are sluggish.



p/s photos: JJ