Saturday May 23, 2009

Maybank strives to get back its roar

By YAP LENG KUEN

THE tiger that had roared with so much power at Malayan Banking Bhd (Maybank) over the last decade has been pretty muted since it shocked the market with its overpriced and ill-timed purchase of Bank Internasional Indonesia (BII).

Its share price got hammered on concerns over capital raising and lower dividends and before it had any chance of gaining ground, the global financial turmoil set in, dragging prices down across the board.

Within less than two months last year, the traditionally sedate Maybank had made three acquisitions for RM12.5bil, the most controversial being the RM8.6bil (4.65 times price to book value) it paid for BII. It has issued RM9.1bil in hybrid securities to fund these acquisitions which are bringing in profits except that some other big charges have to be factored into its Indonesian business.

Maybank president and CEO of barely a year, Datuk Seri Abdul Wahid Omar, has been mandated to “put the roar back’’ into Maybank, and his biggest challenge is to crank up the profits at BII as fast as he can. This despite a looming goodwill impairment estimated within the range of RM700mil to RM2bil.

BII earned a net profit of RM170mil last year. However, there are interest charges of around RM540mil based on a 6% coupon rate on the RM9.1bil of hybrid securities issued. Assuming a 15% long-term return on investment (ROI) of RM8.6bil, there is already a shortfall of RM1bil compared with the RM170mil it is getting. However, Maybank’s new management at BII will probably set ROI targets only at year-end.

“Maybank is a medium term story,” says Keith Wee, a banking analyst at OSK Securities Sdn Bhd. However, BII only makes up 12% of Maybank’s asset base; it is still the domestic operations that will be the mainstay and therefore, its health will be closely monitored.

For the third quarter ended March 31, the Maybank group recorded a drop of 34% in its net profit to RM503mil compared with the previous corresponding period while for the nine months, it registered a decline of 18% to RM1.8 bil, due to lower contributions from investment banking, insurance and takaful, higher provisions and interest expense, impairment cost for MCB Bank and forex losses.

Most analysts are maintaining their “hold’’ or “neutral’’ calls. However, two research houses, AmResearch and Kenanga Research, have revised downwards their recommendations from “hold” to “sell.’’ They expressed concerns over, among other things, the weaker performance of overseas operations (NPLs are up 23% quarter-on-quarter to RM1.14 billion); a significant jump in provisions for loan losses by RM464mil; weaker ROEs from its pricey acquisition and possibility of further impairment charge for its stake in MCB Bank in Pakistan (RM242mil in the first quarter), given the political developments in that country.

Kenanga Research is concerned about a potential further write-off on the BII investment by the fourth quarter. “Management indicated that Indonesia’s market discount rate has shot up to 20%, from 16%, when the acquisition took place recently. Despite no further details, we believe the write-off should be in range of RM700mil-800mil and could offset more than one quarter of Maybank’s profit, resulting in under-performing consensus’ FY09E net profit of RM2.332bil,’’ Kenanga said yesterday.

Back to basics

After the acquisition spree last year, Maybank decided to take a pause and spend time to grow the businesses. Back to the drawing board, it has come up with a two-phase transformation plan that will position it among the top five banks in the region by 2015.

Called LEAP 30 (lead, execute, achieve and progress), the programme essentially has three major thrusts – domestic leadership, regional growth and talent management. A rights issue of RM6bil provides capital for the initiatives over the next two to three years (see box).

Within its domestic franchise, Maybank aspires to be the leader in all high margin products and segments. In consumer banking, it is the largest issuer of credit cards with a market share of 14% while in Islamic banking, it is the largest in terms of assets in Malaysia and largest player in the Asia-Pacific.

Its insurance asset base which represent funds in management, currently at RM20bil, is set to grow under the group’s aspiration to rival those managed by Great Eastern Life Assurance (Malaysia) Bhd, Prudential Assurance Malaysia Bhd and American International Assurance Bhd. It aims to be the national insurance champion and is currently the leader in new business premium for the combined conventional and takaful sector as well as gross premiums for general insurance.

However, investment banking needs to be further strengthened. The target is to build Maybank Investment Bank Bhd (Maybank IB), formerly known as Aseambankers Bhd to be in the top two. The momentum for change had in fact started with former CEO Surachet Chaipatamanont who had restructured Aseambankers into a full-fledged investment banking group but among the league tables, it still trails CIMB Investment Bank, AmInvestment Bank Bhd and RHB Investment Bank.

The new CEO, Mohd Rashdan Yusof, is expected to grow the investment bank further. Wahid is confident that with a structure in place, new hires, retraining of staff and Rashdan’s experience, Maybank IB will be in a good position to capitalise on the recovery. “He (Rashdan) is a chartered accountant with experience in treasury and derivatives,’’ says Wahid.

In terms of loans overseas, Maybank recorded 34% of total gross loans, while under the transformation plan, the aim is to grow overseas loans to 40% by 2015.

The BII challenge

Wahid is banking on the new management he has put in place at BII to deliver the numbers. Currently, among the top seven or eight banks in Indonesia, it has a strong franchise in the business segment and aims to build its consumer (residential and auto) and small and medium enterprises (SME) sectors. Wahid intends to marshall the regional corporate and investment banking expertise to support BII.

The Indonesian banking sector is exciting, with net interest margin (NIM) at 5.5% compared with the 2.5% obtained by Maybank locally. In fact, together with BII, the group’s NIM rises to 2.8%. Banking penetration is low in Indonesia at 30% compared with 98% in Malaysia.

However, the immediate outlook may not be rosy. “It is likely that the Indonesian banking sector will face some macroeconomic challenges given the aftershocks of the global financial meltdown,” says Promod Dass, head of financial sector ratings at RAM Ratings Sdn Bhd. “Nonetheless, Maybank’s acquisition of BII has been opportune for the bank’s business diversification, given the highly saturated and competitive banking landscape in Malaysia. BII’s contribution would likely grow over the long term ... easily be within a three- to five-year horizon.”

The most closely watched figure over the next three months, when Maybank announces its full year results, will be the goodwill impairment charge on the BII acquisition. Maybank is not expected to make a loss from the impairment charge (where cashflow is discounted to arrive at the appropriate asset value) at BII.

“To some extent, that is reflected in the improved share price of BII. Concerns over impairment charge is based on a company’s projection of cashflow and the market value of an investment is partly reflected in its share price,” said Fiona Leong, senior analyst at AmResearch Sdn Bhd. Nevertheless, the assumptions, for example, the discount rate, for the impairment charge will be scrutinised as in the case of Maybank’s 20% stake in MCB Bank of Pakistan, the discount rate of 21% was considered aggressive.

Of immediate urgency, however, is to ensure that domestic operations can withstand the prolonged effects of the financial crisis. No doubt, quick action to restructure loans has helped.

“The situation is manageable, says Wahid, although some companies especially those in SMEs and export-oriented sectors may not be able to make it. Maybank’s net non-performing loans (NPLs), as at end March this year, stands at 1.73%.

Delivering the goods

Wahid and his team have a gargantuan task ahead of them to prove the critics wrong on the BII deal. On one front, they have to grow the profits at BII as fast as they can. “We aim to double the earnings yield of BII (from 2% to 2.5%) as soon as possible,” says Wahid who has indicated a gestation period of four to five years for the investment.

At the same time, they have to ensure that all the other numbers come in to buoy this huge “casualty” at BII. With the completion of the whopping RM15bil capital raising exercise, the management is now able to focus squarely on the task of growing the bank.

Some stress is detected in the international operations with chunky corporate businesses while contributions from treasury, trade finance and investment banking are not looking rosy at the moment.

Can they deliver the goods? The challenge this time is no mean feat as the issues surrounding the BII deal do not resemble anything that Maybank has experienced in its decade of successful organic growth that had been spiced with largely non-controversial acquisitions.

Over the next few years, execution will be key as there is a lot on the plate to digest. Even on the domestic front, which Maybank is heavily reliant on at the moment, further liberalisation could pose a threat to margins. Coming from a high base, it remains to be seen how much growth can be extracted from the local market while the full impact from its overseas expansion has yet to be felt.

In times like these, the challenge is to ensure growth and preserve asset quality. “We have to bear in mind that Maybank is one of the more prudent banks,” says Wee of OSK. Public Bank has shown that it is possible to do both, and Maybank, with its expanding regional presence, may be in a better position to balance both priorities.

Maybank is in a stronger position to fight for its future. “The strengthened capital base will place the bank in a better fundamental position domestically as well as regionally. Being Malaysia’s flagship bank, Maybank continues to enjoy a strong franchise in the domestic system and commands the largest deposits market share,’’ says Dass of RAM Ratings.

It remains to be seen whether or not Maybank will be able to meet its targets. While some expect the targets to be scaled down somewhat, others say they seem reasonably achievable. Dass, for one, appears optimistic – “Maybank has a capable management team. Many of the initiatives earmarked are within the bank’s grasp.”

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