Monday September 17, 2012

BIMB not opposed to buying debt-ridden Dubai Group’s stake in Bank Islam

Corporate Portrait by John Loh

IF the latest developments around BIMB Holdings Bhd are anything to go by, the Islamic financial services group may be shaping up to be one to watch.

Just last week, after it came to light that legal proceedings have been lobbed at Dubai Group over its US$10bil debt, tongues got wagging about what would become of the 30.5% interest it held in Bank Islam, of which 51% belongs to BIMB.

The hypothesis here is that BIMB may just be tempted to acquire the stake from the Dubai state investment vehicle, thereby giving it more or less full control of Bank Islam, Malaysia's oldest Islamic lender.

Of note also is that both BIMB and Bank Islam have a common shareholder pilgrim fund Lembaga Tabung Haji, which owns 51.76% of the former and 18.5% of the latter.

On Thursday, the Royal Bank of Scotland, German lender Commerzbank and South Africa's Standard Bank said they were taking legal action against Dubai Group to compel the diversified financial services company to settle its massive borrowings following the collapse of two years of debt talks.

Like several other Dubai state-linked entities hard hit by the financial crisis in 2008, Dubai Group had in 2010 opened negotiations with creditors to restructure the US$6bil it owed to international lenders and US$4bil in inter-company loans with its parent Dubai Holding, a conglomerate helmed by the city's ruler Sheikh Mohammed bin Rashid al-Maktoum.

To help pare its debt, Dubai Group had this month already sold a Turkish insurance company and is apparently in discussions to dispose of its 45% stake in a joint venture with France-based Lafarge SA, the world's largest cement maker.

A man uses Bank Islam ATM facilities in Kuala Lumpur. One of the country’s largest Islamic lenders, Bank Islam had assets of about RM33.8bil as at June, placing it third behind Maybank Islamic and CIMB Islamic. A man uses Bank Islam ATM facilities in Kuala Lumpur. One of the country’s largest Islamic lenders, Bank Islam had assets of about RM33.8bil as at June, placing it third behind Maybank Islamic and CIMB Islamic.

According to news reports, many more such sales are likely.

“One can safely assume that given the position that they are in, most of their portfolio is for sale. There are some for which they will have to wait longer to get value, but there is a move to sell assets at a faster pace now,” a Dubai-based banker was quoted as saying by Reuters.

Dubai Group had, in fact, tried to hive off its equity in Bank Islam two years ago but was unsuccessful.

In a brief note to investors, CIMB Research raised the possibility of a takeover by BIMB of Dubai Group's Bank Islam stake.

“Any intention for Dubai Group to dispose of its stake in BIMB is not new, considering its financial position. We are positive if BIMB is able to acquire Dubai Group's 30.5% stake in Bank Islam, which is the biggest earnings contributor to BIMB. This will help reduce the leakages' of the earnings from Bank Islam to BIMB,” it said.

The brokerage noted, however, that should a deal transpire, its actual impact would be dependent on the pricing.

“For this reason, we think BIMB is interested to acquire Dubai Group's stake, though the management did not guide for any plans for this.”

When contacted by StarBiz, BIMB did not oppose this idea.

“Firstly, the regulatory processes must be duly observed. We are open on the options but it will be subjected to pricing and must be value accretive,” the company said via e-mail.

Other industry observers also said they did not rule out an eventual acquisition by BIMB, given that such a move would enable the firm to book a higher share of profits from its fast-growing Islamic banking arm, the larger of the country's only two standalone Islamic lenders.

They declined, however, to speculate on a potential price for the sale. Nonetheless, one analyst pointed out that even if Dubai Group were to divest its interest, the financial impact would be negligible compared to its hefty debt load.

In terms of size, Bank Islam has 125 branches across Malaysia and is targeting a branch network of 150 by 2015.

One of the country's largest Islamic lenders, it had assets of about RM33.8bil as at June, placing it third behind Maybank Islamic and CIMB Islamic.

Be that as it may, Bank Islam has increasingly portrayed itself as hungry for growth, having made no secret of its Indonesian ambitions despite two failed attempts to expand there.

“Though we have tried twice and failed, we are not going to give up,” the bank's managing director Datuk Seri Zukri Samat told reporters on Thursday.

He added that the bank was vying for a loan expansion of 30% this year, significantly outpacing last year's 19% growth, which analysts think is achievable on account of its underleveraged balance sheet and the lending activities driven by the Economic Transformation Programme.

Meanwhile, an analyst with Kenanga Research explained that BIMB had always maintained it was keen to extract further value from its investments, which the firm did when it reduced its stake in its listed Islamic insurer, Syarikat Takaful Malaysia Bhd, by some 3% to 62.1% over the past two months.

The brokerage noted in a report that BIMB did this to capitalise on the rise in the shares of Syarikat Takaful, whose market value has tripled to RM1bil from a mere RM326bil in December.

Calling BIMB its “dark-horse pick” for the banking sector, Kenanga Research added that corporate actions might be in the horizon for the group.

“Our view is supported by Zukri's comments in the media that the company is searching for a better proposal to unlock its value with the possibility of Bank Islam potentially assuming BIMB's listing status.

“We believe this is a better structure to avoid a holding company discount disadvantage in its valuation. This proposed structure is not new in Malaysia and has been proven to be successful and effective,” it said.

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