Interestingly the Prime Minister, Datuk Seri Abdullah Badawi, who is also the Finance Minister responded directly to my statement, appearing on the frontpage of the Star yesterday. His key message of assurance was that "the Employees Provident Fund was aware that it is dealing with public funds when it considered investing in the RHB banking group... Don’t tell me they are playing around with money." Judge for yourself if such an assurance is sufficient.
- No Expertise
EPF has neither experience nor expertise in owning or managing a commercial bank. While the other competing offers originates from existing banking institutions seeking to enhance and optimise their current branch network to enjoy economies of scale, the EPF will enjoy no such benefit from acquiring RHB at premium prices.
Both owning and managing a commercial bank are complex tasks requiring competent and experienced professionals. It wasn't too long ago in 1999, one of Malaysia's leading conglomerate, Sime Darby Bhd was left red-faced as they were forced to sell Sime Bank, which they took over a mere 4 years earlier. Sime Bank was left with nearly US$500 million of non-performing loans during the Asian financial crisis.
Sime Darby's acquisition of Sime Bank, formerly known as UMBC Bank, is a clear example of the risk in owning and managing a bank without the necessary expertise and experience. Prior to disposing of the Bank in 1999, Sime Darby Bhd recorded losses of RM541 million in 1998.
- Disproportionate Amount of Risks to EPF Contributors
Based on EPF's 2005 Annual Report, out of its total fund size of RM260 billion, 19.1% or RM49.6 billion was allocated to Equity investment. Hence EPF's RM9 billion RHB acquisition venture represents more than 18% of its total equity investments, without even taking into accounts its existing investment in RHB. Such disproportionate amount of investment in a single stock clearly represents poor portfolio allocation and diversification. The EPF has put at risk our workers' funds by 'betting' heavily on a single large investment.
In addition, the total risk of the bank is 12.5 times its equity value based on a minimum capital-assets adequacy ratio of 8% in Malaysia. This means that in the event of a crisis, for every ringgit investment, up to RM11.50 may be required to bail out the bank and keep it afloat. Will EPF, acting as the owner of the bank, be committed to pump in additional monies from EPF to “rescue” the Bank in the event of another financial or banking crisis?
The Malaysian Government has spent more than RM3.5 billion to bail out Bank Bumiputera on 3 separate occasions in 1984, 1990 and 1998. Will EPF in effect, act as a bail out fund for the bank it now owns?
- Distraction from Fund Management
The acquisition of a Bank by EPF will not only change its charter and increase the risk to the fund contributors, it may also cause poorer performance in its fund management objectives. By redirecting the Fund's attention to the onerous responsibility of owning or even managing a commercial bank, fund management may inadvertently become a secondary concern for the EPF management.
- Throwing Good Money after Bad
As it stands, the EPF's existing 31.7% RM2.3 billion stake in RHB is worth no more than half that amount today, even after the recent rally in RHB stock prices fuelled by the competing bids for the Bank. At its low in 2005, EPF's investment was worth only about RM115 million!
Any attempts to average down the cost of EPF's stake in the bank without an independent look at where RM9 billion will be able to generate better and less risky returns will just be a case of throwing good money after bad.
Is EPF telling us that RHB Bank is the only bank worth investing in, with the best prospective returns amongst all banks in Malaysia? Is RHB so attractive an investment that EPF must make an attempt to acquire all of its shares and take on the risk of ownership themselves? In addition, will owning RHB taint the Fund's independence when valuing shares of other Banks, raising potential conflict of interest issues?
- Regulatory Uncertainty
Under Malaysian laws no Corporation can own more than 20% of a banking institution. RHB owns 65% RHB Capital, which in turns own RHB Bank. With EPF acquiring up to 100% of RHB, it will mean that at some point of time, it will have to divest as much as 45% of its investment in RHB Capital to other interested and approved parties.
There is no guarantee that EPF will be able to secure buyers of this substantial stake higher than or at its GO prices. Any negative turn of events in our stock market may very well result in EPF suffering immediate losses if the block had to be placed out at lower than its GO prices.
To a large extent, the EPF is risking a substantial portion of our funds to the whims and fancies of our stock market.
- Supported by EPF's Investment Panel 'Professionals Representatives'?
Finally, it should be noted that EPF's 7 member investment panel comprises of 3 “Professional Representatives”, two of whom are Datuk Amirsham Abd Aziz, CEO of Maybank Berhad and Datuk Mohammed Nazir Abdul Razak, CEO of CIMB Bank.
Can we confirm if the 2 key investment panel members are in agreement with the EPF board's decision to acquire RHB Bank? And if not, is the EPF board acting recklessly in its investment process by refusing to take heed of advice provided by CEOs of Malaysia's top two banks?
The returns from its existing 31.7% stake may be better if the bank is owned by another competent financial institution, than if they were to own it in its entirety themselves. EPF has absolutely no experience or expertise in managing (or owning) large corporations, much less highly complex financial institutions.
The EPF is not an “aggressive growth fund” seeking to generate 30% returns with equally daunting risks in its investment. The EPF is meant to be an income fund to generate reasonable investment returns and protect the capital of its contributors by taking minimal or at most measured risks in its investments.
We will certainly try to take this matter further.