RHB Capital ... Jun 09

The credit bubble that burst in the Middle East seems to have impacted the local banking industry as well, after a domestic bank is understood to have been caught in a default of an Islamic debt issue recently.

It is learnt that RHB Capital Bhd (RHBCap), the fourth-largest banking group in the country, may face possible losses from a default of a US$100 million (RM350 million) sukuk that was issued by leading Kuwaiti Islamic investment firm, Investment Dar Co.

RHB Bank Bhd, via its Islamic unit RHB Islamic Bank Bhd, had subscribed to US$25 million of the sukuk, but the papers defaulted as the Kuwaiti Islamic investment firm scrambled to restructure its debts.

It is understood that under the restructuring plan, up to US$15 million of the sukuk subscribed by RHB Islamic Bank would be secured. This means that the bank would still be exposed to the remaining US$10 million that had defaulted.

Meanwhile, on a separate matter, the Employees’ Provident Fund (EPF), which owns 57% stake in RHBCap, was still expected to pare down its stake in the banking group. The EPF would still be required to pare down its holdings in RHBCap, but the exercise was not likely to happen this year (2009), given the global economic downturn that would not give the banking group good valuations.

They are writing a letter to Bank Negara Malaysia to seek a time extension to do so.

The EPF sold a 25% stake to Abu Dhabi Commercial Bank (ADCB) more than a year ago. The pension fund, which owned 82.2% stake in RHBCap prior to its stake sale to ADCB, had to pare down its stake to 35% by end-June last year (2008), in compliance with the central bank’s regulations on institutional investors’ shareholding in banking and financial institutions.

In 2008, the EPF said it wanted to keep a 40% stake in RHBCap and had sought Bank Negara’s permission to do so. However, this means the EPF would still have to pare down 12% stake in the banking group.