Maybank has recently announced 9 for 20 rights issue at an offer price of RM 2.74, which represent a discount of 43%. Rights issues are offer of new shares to the current shareholders. If you are not an existing shareholder of Maybank, you are not entitled to the rights. There is a big confusion as many people thought they can subscribe Maybank shares at RM 2.74 without owning the shares first. 9 for 20 rights means, you are entitled to 9 rights issue at RM 2.74 for every 20 shares you currently hold. For those who are interested to subscribe to Maybank’s rights here are a six issues to consider:-
(a) Your average price
Suppose you purchase 20 Maybank shares at a current price of RM 4.58, your average price (before transaction costs) is calculate as below
20 shares@ RM 4.58 = RM 91.60
9 rights@ RM 2.74 = RM 25
Total cost = RM 116
Average cost per share is RM 116 dividend by 29 shares = RM 4.00
The rights issue exercise is expected to be completed by July. If the market price were to trade below your average price of RM 4.00, you would have booked in a paper loss. At the rate the global economy is moving, especially in US, UK and Japan, there is a high probability that Maybank price will trade below RM 4.00 by July.
(b) The purpose of rights
Maybank has stated that the proceeds from the rights will be utilized to boost its Tier 1 core capital ratio to 8.1%. from 5.2% (Basle II minimum standard is 4%). Risk capital weighted ratio will improve to 16% from 13% (Basle II minimum standard is 8%). Basically, the capital ratio tells you the amount of capital that the bank maintains to support its risky asset e.g. loans. If the RCWR is 16%, it means that Maybank has 16 cent capital to support every RM 1 of risky asset/loan. This is very essential as some loans will not be repaid and banks must have sufficient capital to write off these bad debts as non performing loan (NPL).
If I read between the lines correctly, it could also mean that Maybank is resigned to the fact that they are going to face a severe financial stress in coming months. In comparison to other Malaysian banks, Maybank has the largest exposure to international operations. That makes Maybank very vulnerable if global financial crisis continue to deteriorate further.
Analysts expect Maybank to write down its Indonesian and Pakistan operations this year by RM 1.2 billion and RM 892 million. That gives a total of around RM 2 billion. The rights issue is expected to raise RM 6 billion. If this worse case scenario materialized, 33% of the proceeds will be used to cover up the losses in Indonesia and Pakistan alone. This certainly destroys shareholders value.
(c) Poor corporate governance
In the past one year, Maybank purchased two banks, BII and MCB. The targeted acquisition, timing and pricing are wrong. Firstly, Maybank paid 4.3 times and 5.2 times premium over net tangible assets for 97% stakes in BII (Indonesia) and 20% stakes in MCB (Pakistan) in 2008. Against the wishes of minority shareholders, the management has gone ahead with the acquisition despite knowing the fact that global financial system is going for meltdown. Malaysian Minority Shareholder Watchdog had on the record registered the strongest protest and even call for the resignation of the board. Unfortunately, it was overruled by the strength of institutional investors like PNB and EPF. This is another testimony of complete failure of shareholder activism on the part of institutional investor. Now you know why EPF gives you a meager return for your savings.
(d) Non performing loan
The reason given by the management, for the reckless acquisition of BII and MCB is due to the loan growth potential of Indonesia and Pakistan. However, emphasizing growth while disregarding risk is sure path to disaster. As global recession deepens, expect more write offs. In addition, as local economy continues its downward spiral, Maybank will be put to severe financial stress by the end of this year. Maybank is like a walking time bomb as it could go the way of Citigroup. Secondly, can anyone think of a rationale to justify investment in Pakistan? Clearly, it is a failed state with high political risk. Yet, Maybank paid a premium of 5.2 times for only 20% stake.
(e) Earnings dilution
The expanded shareholder’s capital due to rights issue is expected dilute the earnings per share by as much as 45% in 2009. This does not take into consideration expected write offs from bad loans and investment. At this moment, Maybank maintains a dividend payout ratio policy of 60%. It means for every RM EPS, Maybank undertakes to pay 60 cent in gross dividend. I do not expect this payout policy to be retained in view of deteriorating global economic conditions. For your information, Maybank has just missed out on the traditional half yearly dividend. Dividend is considered an important variable to value Maybank, as it is considered a high dividend yield stock. Thus, expected lower dividend will lower its current share prices.
(f) Renounceable
For those who do not wish to participate in this rights issue, you can sell your rights entitlement before the acceptance date.
(a) Your average price
Suppose you purchase 20 Maybank shares at a current price of RM 4.58, your average price (before transaction costs) is calculate as below
20 shares@ RM 4.58 = RM 91.60
9 rights@ RM 2.74 = RM 25
Total cost = RM 116
Average cost per share is RM 116 dividend by 29 shares = RM 4.00
The rights issue exercise is expected to be completed by July. If the market price were to trade below your average price of RM 4.00, you would have booked in a paper loss. At the rate the global economy is moving, especially in US, UK and Japan, there is a high probability that Maybank price will trade below RM 4.00 by July.
(b) The purpose of rights
Maybank has stated that the proceeds from the rights will be utilized to boost its Tier 1 core capital ratio to 8.1%. from 5.2% (Basle II minimum standard is 4%). Risk capital weighted ratio will improve to 16% from 13% (Basle II minimum standard is 8%). Basically, the capital ratio tells you the amount of capital that the bank maintains to support its risky asset e.g. loans. If the RCWR is 16%, it means that Maybank has 16 cent capital to support every RM 1 of risky asset/loan. This is very essential as some loans will not be repaid and banks must have sufficient capital to write off these bad debts as non performing loan (NPL).
If I read between the lines correctly, it could also mean that Maybank is resigned to the fact that they are going to face a severe financial stress in coming months. In comparison to other Malaysian banks, Maybank has the largest exposure to international operations. That makes Maybank very vulnerable if global financial crisis continue to deteriorate further.
Analysts expect Maybank to write down its Indonesian and Pakistan operations this year by RM 1.2 billion and RM 892 million. That gives a total of around RM 2 billion. The rights issue is expected to raise RM 6 billion. If this worse case scenario materialized, 33% of the proceeds will be used to cover up the losses in Indonesia and Pakistan alone. This certainly destroys shareholders value.
(c) Poor corporate governance
In the past one year, Maybank purchased two banks, BII and MCB. The targeted acquisition, timing and pricing are wrong. Firstly, Maybank paid 4.3 times and 5.2 times premium over net tangible assets for 97% stakes in BII (Indonesia) and 20% stakes in MCB (Pakistan) in 2008. Against the wishes of minority shareholders, the management has gone ahead with the acquisition despite knowing the fact that global financial system is going for meltdown. Malaysian Minority Shareholder Watchdog had on the record registered the strongest protest and even call for the resignation of the board. Unfortunately, it was overruled by the strength of institutional investors like PNB and EPF. This is another testimony of complete failure of shareholder activism on the part of institutional investor. Now you know why EPF gives you a meager return for your savings.
(d) Non performing loan
The reason given by the management, for the reckless acquisition of BII and MCB is due to the loan growth potential of Indonesia and Pakistan. However, emphasizing growth while disregarding risk is sure path to disaster. As global recession deepens, expect more write offs. In addition, as local economy continues its downward spiral, Maybank will be put to severe financial stress by the end of this year. Maybank is like a walking time bomb as it could go the way of Citigroup. Secondly, can anyone think of a rationale to justify investment in Pakistan? Clearly, it is a failed state with high political risk. Yet, Maybank paid a premium of 5.2 times for only 20% stake.
(e) Earnings dilution
The expanded shareholder’s capital due to rights issue is expected dilute the earnings per share by as much as 45% in 2009. This does not take into consideration expected write offs from bad loans and investment. At this moment, Maybank maintains a dividend payout ratio policy of 60%. It means for every RM EPS, Maybank undertakes to pay 60 cent in gross dividend. I do not expect this payout policy to be retained in view of deteriorating global economic conditions. For your information, Maybank has just missed out on the traditional half yearly dividend. Dividend is considered an important variable to value Maybank, as it is considered a high dividend yield stock. Thus, expected lower dividend will lower its current share prices.
(f) Renounceable
For those who do not wish to participate in this rights issue, you can sell your rights entitlement before the acceptance date.
