AFG ... Jul11

While speculation is rife that the Singapore government’s investment arm Temasek Holdings Pte Ltd and co-investor Langkah Bahagia Sdn Bhd are keen to divest their combined stake of close to 30% in Alliance Financial Group Bhd (AFG), sources said they have yet to seek the advice of investment banks on how to proceed. No mandate has been given out yet on this deal.

Market talk has it that Temasek may look to sell its stake in AFG, hot on the heels of its partial stakes divestment in two of China’s biggest banks – Bank of China and China Construction Bank – announced this week.

To recap, one of its major shareholders Temasek Holdings Pte Ltd, said it was rebalancing its portfolio, which sparked speculation of potential mergers and acquisitions M&A.

The Singapore-owned investment company, which announced a major real estate tie-up with its Malaysian counterpart Khazanah Nasional Bhd , raised US$3.63 billion (RM10.9 billion) by selling some of its shares in China Construction Bank and Bank of China — China’s No 2 and No 3 lenders by asset size.

It was previously reported that Langkah Bahagia, a company believed to be linked to former finance minister Tun Daim Zainuddin, has been keen to divest its stake in AFG for quite some time. Essentially, Temasek and Langkah Bahagia have a combined stake of 29.06% in AFG through investment vehicle Vertical Theme Sdn Bhd.

Vertical Theme Sdn Bhd is 51% held by Langkah Bahagia and the balance owned indirectly by Temasek. Thus, Langkah Bahagia’s stake in AFG amounts to some 14.8% while 14.26% is indirectly held by Temasek.

However, some are unsure if Temasek would want to exit AFG, especially since its management has time and time again reiterated Temasek’s interest in having a presence in the local banking scene.

The question has been raised before, and Alliance’s management has maintained that Temasek would not want to sell the stake as it wants to maintain its presence in the Malaysian banking scene notwithstanding Bank Negara Malaysia’s rules on foreign ownership of banks.

In 2010, Singaporean Sng Seow Wah was appointed to lead the group’s banking division, Alliance Bank Malaysia Bhd. He is also a director of AFG. Prior to joining Alliance Bank, Sng was the executive vice-president, head of human resources, special projects and corporate communications at Fullerton Financial Holdings (International) Pte Ltd, which is part of Temasek Holdings.

Also AFG can be an attractive merger and acquisition target for foreign players such as Singapore’s DBS Group Holdings Ltd (which is 27% owned by Temasek also). AFG is the country’s smallest bank by asset size, which stands at RM36.07bil as at financial year ended March 31.

Sng’s appointment may be a sign of Singapore’s DBS Group playing a more direct role in AFG. Alliance was a good takeover target and attached an average book value of two times to a potential takeover deal.

AFG is trading (06 July 2011) at 1.67 times its book value of RM2.17 a share at current levels while its price-to-earnings multiple was 11.9 times as at March 31 2011.

However, it is worth noting that the premium for Malaysian banks has gone up a notch after the aborted takeover bids by Malayan Banking Bhd and CIMB Group Holdings Bhd for RHB Capital Bhd.

Is two times book now seen as a new benchmark for Malaysian banks? Market observers said that smaller banks that are left alone will command lower valuations while those seen as having M&A potential will see higher valuations.

But a wider industry range would be 1.8 times to 2.2 times, since EON Capital Bhd was taken over at 1.4 times book value while the recent stake sale in RHB Capital Bhd by Abu Dhabi Commercial Bank was done at 2.25 times price-to-book value.

Some smaller players may see a premium if the big banks see it as an easier way to gain scale

In retrospect, AFG was last in the limelight in the early part of 2010 due to the spat between its former CEO Datuk Bridget Lai and the board. The bank has since stayed largely under the radar with new group CEO Sng Seow Wah at the helm.

It is said that AFG has gone through a paradigm shift from loan-centric to placing more emphasis on developing non-interest income under its new Singaporean CEO.