ADCB's RHB stake to give long-term value

The 25 per cent stake in RHB Capital cost ADCB $1.23 billion. (FILE)


Abu Dhabi Commercial Bank's recent successful completion of a 25 per cent stake in RHB Capital, Malaysia's fourth largest bank, is considered an important and valuable step for ADCB's long-term strategy, its market franchise development and earnings enhancement.

The 25 per cent stake in RHB Capital cost ADCB $1.23 billion (Dh4.51bn). Although this represented a 37 per cent premium to the bank's price before the announcement, it represents a sound purchase price for ADCB. The purchase represented 2.2 times RHB's book value. This multiple is good value as other recent bank stake acquisitions have approached, and often exceeded, three times, and particularly so in other fast growing Asian markets. It was the largest investment so far by a Gulf investor in Malaysia's financial sector.

Although RHB's performance has lagged Malaysian peer banks, such as Maybank, over the last few years, the bank holds a very good position in the Malaysian banking sector. RHB's return on average equity was a low 11.9 per cent in 2007. This compares to Maybank's 17.6 per cent and ADCB's ratio of 18.8 per cent. RHB's return on average assets was just 0.7 per cent in 2007 against 1.3 per cent for Maybank and 2.3 per cent for ADCB. RHB's returns were low in 2007 despite a 63 per cent rise in net profit to $225m. Size wise, the banks are similar with RHB's assets of $33bn and ADCB's $30bn.

Currently undergoing a restructuring programme, RHB aims to double its profit over the next three years and ADCB believes the bank will achieve this.

A lot of this organic growth will be driven by the Malaysian economy, which is expected to continue to grow robustly going forward. ADCB's own target for RHB's return on equity is initially around the 17 per cent level. Improving efficiency is a major pillar of RHB's aim for lifting profitability.

RHB Banking Group's four broad categories of businesses – commercial banking, Islamic banking, investment banking and insurance – are collectively grouped under RHB Capital Berhad, which is listed on the Malaysia Bourse. The group's businesses are offered through its main subsidiaries – RHB Bank and RHB Investment Bank, which are wholly owned by RHB Capital, and RHB Insurance, which is 79.5 per cent owned by RHB Capital. Its Islamic banking unit, RHB Islamic Bank Berhad, is wholly-owned by RHB Bank, while its asset management and unit trust businesses are held under RHB Investment Management, a wholly-owned subsidiary of RHB Investment Bank.

The most immediate attraction of RHB, and in particular Malaysia overall, is its Islamic banking operations. RHB has initiated a number of initiatives within its Islamic banking activities and this should be supported by ADCB's own market presence and client base.

RHB offers a wide range of Islamic products, including business loans and investment banking services, as well as retail products such as home loans and car loans, that are in compliance with Islamic principles.

In particular, RHB hopes to exploit ADCB's international sukuk market. ADCB believes it has many businesses lined up to be captured by both ADCB and RHB Capital. ADCB can structure a vehicle where 50 per cent of the sukuk market goes to RHB Capital as it cannot capture everything on its own balance sheet. Its ability to syndicate sukuk loans should be enhanced.

Longer term, ADCB's and RHB's plan is to significantly raise the size of the bank and for RHB Capital to become the number one bank in Southeast Asia. Although this specific aim may be challenging, the bank should nonetheless expand and broaden its reach.

RHB Capital's major shareholder is still Malaysian state pension fund, the Employees Provident Fund (EPF), which controversially won a 2007 takeover battle for RHB, paying $3.6bn to beat rival bids from Kuwait Finance House and Malaysian lender EON Capital.

After the deal, the pension fund's stake in RHB falls to 57 per cent from 82 per cent. RHB appointed former Chase Manhattan banker Michael Barrett as its new group chief under a revamp plan to double its market value by 2010. Kuwait Finance House's loss is definitely ADCB's gain with the large Kuwait Islamic lender needing to look elsewhere to deepen its market position.

EPF saw strength through ADCB in its ability to help build value in RHB, with contribution in terms of strategy, Islamic banking, and financial backing. Malaysia itself aims to become a global hub for Islamic finance. Malaysia is already home to the world's largest Islamic bond market and is a regional hub for Islamic finance. Much of innovative Islamic product development has originated in Malaysia. Throughout Asia there is growing demand for Islamic banking services.

The management will endeavour to grow Islamic banking assets and profits for RHB and ADCB. RHB Capital and Abu Dhabi Commercial Bank will now be uniquely positioned to leverage on growing business flows between GCC and the Asian region and strengthen both banks' strategic position in the global Islamic banking market. Currently, Islamic assets at RHB represent only 8.2 per cent of consolidated assets and 5.3 per cent of operating revenue. Both are however expected to grow quickly. Islamic banking business revenue at RHB grew by 39 per cent in 2007 with pre-tax profit up by 33 per cent.

RHB has banking operations in Singapore, Thailand and Brunei. It has 280 retail banking branches, investment banking operations and an Islamic subsidiary that is the sixth-largest Islamic bank in Asia.

Ties and commercial links between Asia and the Gulf and wider Middle East continue to increase. Gulf financial institutions are increasingly looking at international opportunities to both broaden earnings and grow assets, particularly as competition increases domestically.