Malaysia’s fourth-largest financial services group had a tough first half of 2015. Holding company RHB Capital reported net profits of MR1bn ($237m), almost flat when compared with the same period last year, while its pre-tax profit dipped 2.9%.
The corporate and investment banking division has disappointed this year. It reported pre-tax profits of 49.7% lower at MR333.7m, affected not just by a one-off impairment cost but also a combination of higher impairment charge on allowance for loans, lower net fund based income and lower fee income. The lower fee was down to to slimmer investment banking revenues owing to a volatile market and subdued capital markets activity, it said in August.
It has certainly been a lacklustre year in Malaysia, with 80 firms having raised equity worth $3.197bn on Bursa Malaysia — a marked fall from the $7.229bn raised collectively by 105 companies over the same period last year, according to Dealogic.
The drop is hardly surprising, however. This year the Malaysian economy has stagnated, the ringgit has come under pressure and the country has been dogged by scandals surrounding 1MDB, the state-owned development fund. This combination has led to the benchmark equity index posting a negative 5% return year to date.
In a bid to shrug off some of the troubles, RHB’s investment bank is on a mission to expand its operations outside Malaysia, with the management particularly eyeing opportunities in the rest of southeast Asia.
“Malaysia will always be our core market,” Gan Kim Khoon, a director and regional head of equity capital markets at RHB Investment Bank, told GlobalCapital Asia. “But we’ve realised that we’re under-represented in other southeast Asian markets, especially large ones like Indonesia, Philippines and Thailand.”
The bank has already made some progress. It scooped its first mandate for a Thai IPO this year, working on a Bt2bn ($60m) offering for Amata Vn, a unit of industrial estate developer Amata Corp. The listing was launched on Tuesday, with RHB leading the trade alongside domestic firm Siam Commercial Bank.
Southeast Asia focus
Winning new business in markets dominated by bigger domestic players is a challenge, but RHB is positioning itself as a regional, rather than Malaysian, bank.
“We don’t want to deliver just Malaysia or just Indonesia,” said Mike Chan, managing director of RHB Investment Bank. “We deliver southeast Asia. If an Indonesian company wants to list in Singapore or raise a bond in Malaysia and convert it into rupiah, we make it happen and that’s how we pitch to clients.”
The investment bank is focusing on boosting its capabilities next year. It plans to add four people to its fixed income team in Thailand and another four to its debt capital markets unit in Indonesia. Chan is also keen on boosting the bank’s ECM capabilities but said that any hires would depend on where the need is.
RHB has no presence yet in the Philippines, though this is something the management is keen to change. Sources close to the bank said it is looking to apply for a new licence in the country or to find a domestic brokerage house to set up a joint venture with.
“We’re part of the RHB Banking Group so we can leverage on the commercial bank and its balance sheet to get new businesses in other markets,” said Gan. “The way we’re doing this is through cross-referrals where the commercial bank has a closer relationship with companies than the investment bank so we leverage on that. If we have a transaction banking relationship with a corporate rather than a lending relationship, we leverage on that too.”
Less aggressive
This slow but steady approach is important for RHB, which one Malaysian bank analyst says took a very aggressive approach towards growth in 2014, when its aim was to become the third largest bank in Malaysia. Given slower markets this year, it was forced to take a more cautious approach.
RHB Banking Group is understood to have set itself a target of netting 20% of its profits from non-Malaysian businesses in the next five years, up from between 5%-10% at the moment. The bank analyst said that its earlier target was set at an ambitious 40%.
But the less aggressive approach is expected to hold it in good stead.
“Clouds are gathering for Malaysian banks, driven by slower economic growth in Asia Pacific, as well as domestic headwinds like the weaker ringgit and low energy prices,” said Eugene Tarzimanov, vice-president and senior credit officer at Moody’s, which has given RHB Bank’s senior unsecured debt an A3 rating. “So we expect NPLs to increase in the banking system and profitability to decrease. In this context, we expect RHB Bank to see a similar trend.”
While he said the bank is Malaysia-focused, any expansion outside of the country would be unlikely to affect its credit much. “The scale [of growth] won’t be significant, especially if it is client-driven transactions that are capital light for RHB,” he said.
RHB’s Chan considers CIMB, DBS and Maybank to be its main competitors regionally, but said the southeast Asian market is big enough to accommodate multiple strong firms. However, the investment bank is not aiming to compete with global houses in the region, but prefers to stick to its regional counterparts.
“From the outside, all our services might look the same but from the connectivity perspective, skillset, and having a relationship with the client, we deliver as a whole,” said Chan. “Global banks have the advantage as they have strength in the dollar market. We are doing southeast Asian local currency where we’ve found our niche and this is key to remain competitive.”
The firm’s approach is first to go for smaller roles or target small and mid-sized companies for new business, before branching out to bigger names.
“We need to build a track record in every market before we can become the natural choice for companies and we’re looking to build that,” added Gam.
The extra focus on expansion comes as RHB is restructuring. RHB Capital is currently the holding company, with RHB Bank, RHB Investment Bank and RHB Insurance sitting under it.
But the firm has proposed a rejig that will remove RHB Capital as the holding company, with RHB Bank made the parent of rest of the banking group.
The restructuring is expected to be completed next year, and the move will help the firm save on tax and be more capital efficient, said the banking analyst. Keeping a holding company with no operations can be administratively onerous, and the restructuring could be more cost effective, he added.