Thursday, March 05, 2009
Maybank's Not-So-Right Rights Issue!
I can understand the left hand right hand rights issue by TMI, supported by Khazanah, following the big cash giveaway by Telekom Malaysia. That was a preconceived strategy when the company was split up. The Maybank rights issue is altogether different. As reported by Finance Asia with my comments in purple.
Finance Asia: Investors reacted negatively to the RM6 billion ($1.6 billion) rights issue announced by Malayan Banking, or Maybank, after the close on Friday
The renounceable rights issue had been well-flagged in the local media and on the wires, and thus the sell-off was most likely not due to the pending dilution, which could be as much as 45%. The Malaysian lender's earnings report for the six months to December 2008, which was also released on Friday, may however have sparked a realisation that its capital-raising exercise may not be quite as pre-emptive as for some of its Singapore peers, such as DBS.
Its capital ratios may look okay for now, but analysts take a cautious view in light of the difficult economic environment -- second finance minister Nor Mohamed Yacop said on Friday that the government isn't sure whether Malaysia will be able to escape a recession -- as well as Maybank's aggressive overseas expansion. (Duh! Only government departments and officials touted the "we may not be going into a recession, we might be able to avert it even"... if they bothered to check not-the mainstream media, its foregone conclusion months ago. People, its ok to go into recession, even the man on the street is ok with that, what we want to know is that our government is able to face up to it early, be transparent and candid about it, and then try to tackle it intelligently... on all counts, fail, fail, fail.. The citizens need not be lulled into a false sense of security, people are smarter nowadays, no thanks to main stream media and official pronouncements. Something is not right when many outside the government can read economic trends better!)
J.P. Morgan noted in a report that Maybank is facing a deteriorating economy and added that there is little likelihood of an "upside surprise in earnings". And Fiona Leong of AmResearch argued that "while its domestic operations remain healthy, the group's international operations are experiencing stress. Furthermore, its just-announced rights issue is highly dilutive and will cap share price performance." Both banks have a sell-equivalent recommendation on the stock.
However, Maybank itself referred to the proposed rights issue as a pre-emptive move to further optimise its capital structure and strengthen its balance sheet to enhance shareholder value. It will also "address market expectations for higher capital levels for financial institutions globally", the bank said. Bloomberg quoted representatives from the bank at a press conference on Friday as saying that the capital raised from the rights issue will be sufficient for the next three to five years and that Maybank doesn't see a need to raise more capital.
Following the rights issue, the bank's core capital ratio will increase to 11.01% from 8.13%, while its risk-weighted capital ratio will improve to 16.42% from 13.54%, based on the end-2008 results. Its gearing ratio will drop to 0.58 times from 0.77, based on the balance sheet for the fiscal year to June 2008 and adjusted for "certain material transactions". The money raised will be used for working capital and general banking purposes.
The bank, which is Malaysia's largest lender by assets, proposed to issue up to 2.212 billion rights shares on the basis of nine new shares for every 20 existing shares at a 30% to 40% discount to the theoretical ex-rights price. This is in line with DBS's $2.7 billion rights issue in January, which was offered at a 35% discount to the theoretical ex-rights price. The ongoing rights offers for Singapore developer CapitaLand and Indonesia's Bank Danamon are also offered at discounts of 35% and 34%, respectively, while CapitaMall Trust is offering its shares at a 28.7% discount to the theoretical ex-rights price.
The exact price of Maybank's offering will be determined at a later, yet to be specified, date, which will give the bank, and the arrangers, the flexibility to respond in case the market should take a sudden turn for the worse, or perhaps for the better.
Maybank's shareholders will need to approve the rights issue at an extraordinary general meeting, expected to be held in about three weeks, and representatives for the bank say they plan to complete the fund-raising by the end of April.
Existing shareholders representing 69.4% of its capital have agreed to take up their share of the offering. These include Employees Provident Fund, which holds 13.7%, Permodalan Nasional Berhad (PNB), which has a 5.9% stake, and Skim Amanah Saham Bumiputera (ASB), which is a unit of PNB and Maybank's largest shareholder with 45.6%. On top of that, PNB will apply for an excess allocation of up to 20%. (Obviously a smart move in anticipation of a possibility that the rights might be under subscribed. Getting PNB in for excess allocation is smart, so that the rights issue wouldn't turn into a fiasco).
According to Maybank, the remaining 10.6% will be underwritten by other parties, which haven't yet been determined. However, it is expected that Credit Suisse and Goldman Sachs, which are the international advisers for the rights issue, will play a role. Maybank-IB is a principal adviser for the issue.
Maybank reported a net profit of M$735 million for the second quarter of fiscal 2009, which ends on June 20 this year - a 28.4% improvement from the first quarter. The profit in the first half to December 2008 declined 10.9% from the same period a year earlier to M$1.3 billion, primarily due to a 27% increase in overhead expenses and a 77% surge in loan loss provisions to M$504 million.
AmResearch noted that the gross NPLs from Maybank's international operation more than doubled to M$927 million in December 2008 from M$406.5 million six months earlier. The bank also did not take any impairment charges for the second quarter of fiscal 2009 related to its recently acquired stakes in Bank Internasional Indonesia, MCB Bank in Pakistan and An Binh Commercial Bank in Vietnam following a M$242 million impairment loss for its 20% investment in MCB in the first quarter. (This is where the crux of the matter lies, Maybank bought and invested late into regional banks, at highish prices. The crisis has basically set Maybank up to need to write down substantially on their acquisitions. NOTE THAT NO IMPAIRMENT CHARGES WERE RECORDED for the latest quarter - hint, its coming over the next couple of quarters!!!).
The Maybank management expects to complete an impairment review for its acquisitions in BII and MCB by June 2009, and AmResearch's Leong says any potential impairment losses will drag earnings lower and dent the projected book value.
"Maybank paid an average of 4.3 times price-to-book for its 97.2% stake in BII and 5.2 times for the 20% equity interest in MCB. Our calculations suggest that should Maybank write down these investments to 3.5 times price-to-book, there would be an impairment charge of M$1.258 billion for BII and M$892 million for MCB. The total impairment charge of M$2.15 billion would be 80% of our revised core net profit of M$2,687 billion for fiscal 2009," she said.
Rights issues are without question the capital raising method of choice in Asia this year, with 29 deals worth a combined $2.5 billion completed so far, according to Dealogic, which doesn't include the portion of the rights offer taken up by the controlling shareholder in its calculations. This is the highest year-to-date volume in the region ever and follows a record year for rights offers in 2008 when $15.2 billion was raised from 155 deals.
Traditionally not that popular with major companies in Asia, rights issues have moved to the forefront as investors remain cautious about taking on new exposures, making it almost impossible for companies to raise equity through new share placements - especially in larger sizes above $1 billion.
Maybank's offering will run almost parallel to a rights offering by Malaysian mobile operator TM International, which last Thursday announced plans to raise M$5.25 billion ($1.4 billion) over the next couple of months. The TMI deal has strong support from its largest shareholder, Khazanah Nasional, which has committed to buy up to 65% of the deal, if necessary.
Final thoughts, sell first ask questions later. The rights will be an uphill exercise. If you still want to buy Maybank, look for when the rights are traded, they could be "very cheap". Even when you get the rights cheaply, remember you will have to tolerate a few quarters where there will be substantial writedowns on the regional banks' acquisitions.
p/s photo: Meisa Kuroki