Tuesday, March 13, 2007

EPF Track Record

Both the Prime Minister, Datuk Seri Abdullah Badawi, who is also the Finance Minister as well as the Employee Provident Fund (EPF) CEO, Datuk Azlan Zainol have argued that they will employ banking professionals to run RHB Bank which EPF has acquired, subject to approvals.

In addition to issues relating to higher risks which have been raised earlier, EPF's decision in this case raises a few additional questions.
  • Firstly, why does the EPF Board believe that they are the best judge of banking professionals to operate and manage the Bank? Wouldn't an existing banking institution, with the necessary expertise be a better judge to do so?

    Hence wouldn't the interest of EPF and its contributors be better served if another banking institution which has the necessary expertise and experience, has taken over the stake from Utama Banking Group (UBG)?

  • Secondly, it is worth noting that the EPF Board has no proven track record to speak of, in recruiting the best candidates to operate its own subsidiaries. In fact, in its 63% owned subsidiary, Malaysia Building Society Berhad (MBSB) which is a financial institution in itself, has performed terribly in recent years.

    One of the key reasons for EPF’s poor investment returns are due to EPF’s involvement in questionable projects and bad loans given out by MBSB. MBSB is notorious for giving huge loans to politically-connected companies such as to the failed Perwaja Steel Bhd. In Melaka alone, such bad loans by MBSB amount to more than RM 150 million.

    Non-performing loans by MBSB reached a high of RM 4.45 billion in 2002 and is at RM 4.33 billion in 2003. MBSB achieved the dubious distinction of having the highest non-performing loan ratio of 62% amongst all banks in the country, against the banking average of 7.4% in 2002. MBSB lost almost RM 1 billion in profits from 1998-2002, reducing its shareholder funds of RM 1.1 billion to only RM 70 million.

    If EPF is unable to find the “right” banking professionals to manage an existing subsidiary which suffered such heavy losses, why does the Prime Minister and the EPF board believe that it can do any better for a much larger financial institution in RHB Bank?
EPF should stick to its charter to prudently manage the retirement funds of Malaysian workers utilising low risk strategies such as a diversified portfolio in equities to generate safe and reasonable returns. EPF has no business attempting to be a “business owner” which leads to re-aligned objectives and incentives as well as significantly higher risks.


Anonymous said...

I concur that EPF should not, in general, be investing local Malaysian companies, but for different reasons that you mentioned. The pensioners in Malaysia is best served if EPF invest the majority of its fund in globally-diversified international equity and bond indices (this way allows retirees to capture the entire world economy's returns).

Your point that EPF has no experience in banking and therefore shouldn't invest in banks (even if the bank is selling for a cheap price; this is only an assumption for argument sake) is invalid because capital owners need to know to run the business -- they employ CEOs to do that. Warren Buffett does not know how to run the many businesses that he owns; instead, his success is due to his superior capital allocation ability. As a former CEO, you well know that your investors need not know your business.

My hope in posting this comment is that you would bring to the public attention the right issues, not issues that make good politics. (although I know you're now in DAP).

Anonymous said...

Dear Anon above,

No, no. A pension fund should invest largely to match its obligations not make high returns. The strategy of high returns investment (known as alternative investing) is only part of that overalls strategy of matching its future obligations. Hence EPF foreign portfolio SHOULD BE LIMITED. Alternative investing is about catching those rare superior opportunities.

Where is it Tony said EPF should not investing in banking sector? Tony and everyone else is saying not OWNERSHIP and all its obligations especially in a bank.

Anonymous said...

Lucky I withdrawn all my EPF oredi!!

I EPF not making money or making losses, no longer affect my money!

But I think EPF better invest in Eurotunnel or Airbus.... :))))

Anonymous said...

Can you trust the judgement of our sleepy half-past-six Finance Minister stupid Pak Lah who failed his statistics paper in high school? 3 year ago this hypoctite promised to fight corruption and since then he appeared to do the opposite in view of the most recent corruption ranking. Now he still fools around with the nation to create the fake 'feel good factor' while people are suffering to make ends meet. Malaysians should not be afraid to dump this corrupted government by voting BN out in the next GE and vote in opposition. Give opposition party a chance to kick Bodohwi's ass before the whole country sinks deep further!! Remember BN = Burden of the Nation!!

Anonymous said...

First anon,

"this way allows retirees to capture the entire world economy's returns"

Sounds sweet but you did not mention the risks involved. Maybe you should talk about what can EPF do if the business screwed up as this is a high risks business.

"they employ CEOs to do that."

If they don't give the position to cronies and really employ the capable one lah. But chances are cronies will get it lah.

"Warren Buffett does not know how to run the many businesses that he owns; instead, his success is due to his superior capital allocation ability."

You absolutely right! however many of those jokers are not Warren Buffett!

Anonymous said...

Hiring an experienced CEO to manage a business is a good idea. But a business success does not depend on its management only. External factors are also very important.
Can anyone tell me the number of banks in Malaysia? A quick check on http://www.bankinginfo.com.my/index.php?tpl_id=203 gives you a list with 23 banks. With additional foreign investment from East Asia in our banking industries, there will be more banks in M’sia in the future. What will happen then? Banks will fight for businesses and offer better packages for loan. Banks have to live with lower profit margin. Can anyone name me The Top 3 Banks with management awards in Malaysia? Top 3 banks have huge capital, knowledge and existing market. To compete with these banks is the same as committing suicide. Unless the fresh bank can “invite” the whole management team from one of these top 3 banks, the chances of winning is slim to none.

Anonymous said...

In the first place, why investing in sick companies ? RHB alone has RM3.98 billions of debt. To add wounds, why further invest in MBSB ? Who benifits from these lost and who make huge lost from these loses? What happend to OPM ?

Why these shituation allows to happen in this country. Are the ministers are hired to develop the country ?

How much more GLCs companies allows to operate at a lost ? Are'nt Malaysian are capable to run business ? DO we have world class accountants and fianacial palnners ? If no, why don't we import.

As net exporter of oil are'nt we getting more margin from the sales of oil in world market ? Where does this money goes ? Why need to cut fuel subsidies further when we gain ?

No Answer