The Curious Tale Of RHB Bank

Malaysian banking tycoon Rashid Hussain unexpectedly finds his bid to raise his stake blocked--and might even lose control altogether

By S. Jayasankaran/KUALA LUMPUR
Issue cover-dated February 22, 2001

IT SHOULD HAVE BEEN the proverbial happy ending. In October 1999, euphoria reigned after RHB Bank was added to a list of 10 proposed anchor banks that would spearhead Malaysia's bank-consolidation exercise. A slew of full-page advertisements congratulating group Chairman Abdul Rashid Hussain appeared in the national dailies. Indeed, a day after the announcement, a smiling Rashid was spontaneously applauded by investors on the trading floor of his stockbroking subsidiary after he was spotted making his way to his office.

They should have held the champagne. On February 2, the Finance Ministry blocked a deal that would have strengthened Rashid's hold over RHB Bank, the country's third-largest. Considering the deal clearly benefited taxpayers, the ministry's move only served to confirm speculation that Finance Minister Daim Zainuddin was moving to oust Rashid from the bank.

The ensuing uncertainty roiled the shares of RHB Capital--owner of 70% of unlisted RHB Bank--which on February 12 had fallen 18% to 2.69 ringgit (71 U.S. cents). (Rashid owns 22% of the RHB group, which controls 55% of RHB Capital.) It has also sparked worries about another bank whose controlling shareholder is also perceived to be in Daim's bad books--entrepreneur Azman Hashim and his family-owned Arab-Malaysian group. His flagship AMMB Holdings' shares have fallen 9% to 3.56 ringgit since the RHB announcement.

It hasn't done much for investors' hopes of policy predictability, either. Analysts fretted about politics continuing to shape a banking landscape thought to have been already freed of government interference. After the Asian Crisis exposed the vulnerability of the region's banks, Malaysia's central bank decreed that 58 financial institutions would be merged under six "anchor banks" for greater financial strength and stability. Four influential bank-owners, including Rashid and Azman, lobbied Prime Minister Mahathir Mohamad and ultimately the central bank raised the number of anchor banks to 10.

Daim's latest move could presage a second stage of bank consolidation that could see either the formation of Southeast Asia's second-largest bank (after Singapore's DBS Bank) or, more likely, the creation of another domestic banking giant. Two huge banks, say analysts, would make monetary policy easier as the smaller banks would find it tougher not to follow their leads in setting central bank-prescribed interest rates. It would also dovetail with Mahathir's "Think Big" credo, which seeks to create large Malaysian companies that can compete regionally.

The only two banks with the wherewithal to replace Rashid at RHB Bank are the country's two largest--Maybank and Bumiputra-Commerce. Merger with Maybank would create an entity with assets of 202 billion ringgit ($53 billion), second in the region only to DBS Bank. An RHB-Commerce combination would create a bank with assets of 124 billion ringgit, just shy of Maybank's current 147 billion ringgit in assets. Either option makes sense to other financiers. "It can't be just about getting rid of Rashid," says the chief executive of a financial services company in Kuala Lumpur. "A bigger merger down the road is perfectly logical." Daim did not respond to requests for an interview with the REVIEW.

It won't happen any time soon, though: both Maybank and Commerce are rationalizing operations following takeovers of their own and Rashid, however vulnerable, is no pushover. But the betting is on a Commerce-RHB Bank tie-up in future. First, both have a common shareholder in Khazanah Nasional, the federal government's investment arm. Second, two conglomerates with close links to Daim--Renong and Malaysian Resources Corporation--have substantial shareholdings in Commerce that they want to sell in order to prune debt. A Commerce-RHB Bank merger could spark interest in their shareholdings as institutions move to take stakes in an entity as large as Maybank, already an institutional favourite.

Finally, thanks to Rashid staffing the bank with professional management, RHB Bank has built a considerable franchise for itself. Its strength in consumer banking, says Kuala Lumpur securities firm Thong & Kay Hian in a January report, "is something Commerce can leverage upon." Analysts also agree that a merger would eliminate keen competition between their merchant banking arms, which are among the country's most aggressive.

If it happens, however, it will be an undignified exit for one of the region's most prominent businessman. Rashid, 54, is married to Sue Kuok, the daughter of Malaysian magnate Robert Kuok, but he didn't need that connection to become big. Intensely ambitious, he always sought to make himself bigger and more competitive. The greatest irony is that it was Daim, as finance minister between 1984 and 1991, who helped him get started. Beginning as a stockbroker capitalized at 2 million ringgit in 1983, Rashid's business acumen and contacts soon established him as a major force in stockbroking. His holding company, RHB, was listed in 1987, and Daim allowed RHB to buy 20% in what is now RHB Bank in 1990.

Anwar Ibrahim became finance minister in 1991. An economic boom began and Rashid really took off. RHB got into property in 1995, launching the 1.2-billion ringgit Vision City project in Kuala Lumpur, and RHB Bank bought Kwong Yik Bank from Maybank for 3 billion ringgit. For his part, Mahathir embraced the can-do businessman, appointing him to the boards of Khazanah and Putrajaya Holdings, entrusted to build a 20 billion ringgit administrative capital. At that point, his empire was worth over 8 billion ringgit.

But continued expansion proved to be his Achilles heel. To keep funding growth, Rashid kept issuing new shares to friendly parties--government agencies that mostly reported to the finance minister. He also borrowed heavily. The upshot was a continuing dilution of his stake in the holding company amid mounting debt. Rashid now controls 22% of his flagship RHB compared with more than 40% previously. RHB has piled up debt of over 3 billion ringgit.

Then came the Asian Crisis and Rashid undertook another purchase that would come back to haunt him--troubled Sime Bank. The ensuing merger saw Khazanah taking a 30% stake in RHB Bank while Danamodal, the bank-recapitalization agency, pumped 1.5 billion ringgit into the merged entity--on terms very favourable to RHB Capital.

But all this happened during the tenure of a friendly finance minister. Anwar's ouster on moral misconduct charges set the stage for Daim's return and the beginning of Rashid's problems. It isn't clear why the two men fell out, but Daim allies say the minister wasn't impressed with Rashid's aggressive stewardship of the group. Still, Rashid landed anchor-bank status--after lobbying Mahathir--and proceeded to repay 500 million ringgit of the Danamodal loan.

Then came the blow from the Finance Ministry. Rashid's offer to pay Danamodal a 38% premium over the 1 billion ringgit outstanding was rejected. Danamodal could now end up as a 14% RHB Bank shareholder. Together with Khazanah's stake, it would give the government 44% of the bank, leaving RHB Capital, and Rashid, vulnerable. Analyst note that he is even more vulnerable at the holding-company level: government agencies and Daim-allied shareholders hold almost 50% of RHB. "If push came to shove, he could be forced out," says a foreign banking analyst who tracks RHB Capital.

The banking community is scrutinizing the events closely, none more so than Azman Hashim. His Arab-Malaysian owes Danamodal 460 million ringgit. Arab-Malaysian is negotiating to takeover MBf Finance, which, in turn, owes Danamodal 2.3 billion ringgit. "I think Azman should be worried about what can happen when one is exposed to Danamodal," says a businessman close to him.

Rashid declined to speak to the REVIEW, but his allies say that he's resigned to going back to broking. RHB's four broking companies are grouped outside the bank under a separate company, almost as if the businessman had anticipated this outcome. A senior official says that Daim just wants the bank--not RHB's property or broking investments--and thinks that's a prelude to second-stage bank mergers. Even so, those expecting a dramatic, and immediate, denouement to the Rashid Hussain saga should know better. "It could take 2-3 years to sort everything out," says the chief executive of the financial services company.