Bank Rakyat eyes stake in MBSB

Bank Rakyat is eyeing a stake of up to 30% in Malaysia Building Society Bhd (MBSB), sources say. In a deal which sources say was initiated by the Ministry of Finance, the stake is to be acquired from MBSB's largest shareholder, the Employees Provident Fund (EPF), which has 62% in the building society. It is believed that Bank Rakyat's board has approved the purchase of the stake. "It makes sense. It is a viable combination as it combines MBSB's strength in property financing with Bank Rakyat's retail and personal finance base. MBSB can also tap into Bank Rakyat's branch network," says a source. Bank Rakyat is a cooperative that generates most of its business by giving out personal loans, particularly to civil servants. It is also big in Islamic banking. The plan is for the merged entity to compete more effectively. Even at MBSB's current price of RM1.06, a 30% stake would cost Bank Rakyat RM107.56 million. But the deal is expected to be at a significantly higher price than the current market value. For the financial year ended Dec 31, 2006, Bank Rakyat's cash and short-term funds stood at RM1.5 billion, while its deposits and placements with financial institutions were at RM2.5 billion. Its revenue jumped 24% to RM1.96 billion, while its net profit increased 25% to RM368 million. MBSB's CEO Ahmad Farid Omar, when contacted on the development late last week, declined to comment on the matter. Apart from the EPF, the other major shareholder in MBSB is Permodalan Nasional Bhd, with a 11% stake. After incurring huge losses between 1998 and 2003, MBSB returned to the black in 2004 and has managed to improve its financial performance thus far. For its financial year ended Dec 31, 2006, revenue jumped 28% to RM293.1 million from RM229.5 million in 2005. Its net profit increased 3.6% to RM40.2 million from RM38.8 million in 2005. One reason for the improved results, according to Farid, is MBSB's decision to nurse its non-performing loans (NPLs) instead of selling its bad loans to a special-purpose vehicle (SPV). This strategy seems to have worked well — the group's NPLs have more than halved in the last five years. Farid says the company is already seeing results. "Our NPL ratio has dropped from 60% in 2002 to 25% today. It is a result of nursing," he tells The Edge in an interview that was done earlier in the week. The NPL ratio is the proportion of bad loans over total loans. On average, local banks have NPL ratios of about 5% currently. Initially, MBSB had planned to place its NPLs under a SPV, but decided to change tack. "If we sell to a SPV, it will normally involve a haircut which, I think, is not a good strategy. This is because MBSB's NPLs are all secured by property," says Farid. He adds that some of the building society's delinquent loans are backed by properties in good locations such as Ampang and Sungai Buloh. "The value of land has increased tremendously, especially in Penang, Ipoh, Johor and the Klang Valley," he says. Farid adds that recovering the loans is a matter of holding on to the property and selling it at the right time. "With property, the beauty is that there is always a premium," he explains. "When we manage to settle it [the sale], there is a write-back. It's very seldom that we make a loss on a sale." Settlement, however, takes time. Farid says some bad loans may take up to seven years to resolve. MBSB's NPL issue stems from its legacy loans that were approved in the 1990s. Back in 1994, MBSB diversified from its original core business of taking deposits and providing loans to house buyers. It ventured into property development as well as providing bridging and revolving loans for the sector. After the Asian financial crisis hit in 1997, MBSB found itself in dire straits: it was saddled with delinquent loans. In 2000, the group's net NPL stood at RM2 billion. After implementing its restructuring strategies, the company has managed to reduce this figure to RM850 million currently. Farid notes that none of MBSB's new loans given out since 2003 has turned delinquent. "We are very strict in our credit assessment; we have developed a risk management department to look into the projects' risks," he says. Not only have MBSB's NPL numbers come down, the company has also seen considerable loans growth in the last five years. In 2002, its housing loans stood at RM1.1 billion. This has since tripled to RM3.5 billion. Farid says 9% of MBSB's housing loans were non-performing because of the customer profile, largely buyers of medium to low-cost houses. He notes, however, that more than half of these bad loans are "moving NPLs", which means these borrowers still pay their instalments as and when they can. Depositors also have more faith in MBSB these days. Five years ago, the building society had to pay higher borrowing costs to fund its lending, after its customer deposits shrank considerably. Farid says loans are now largely funded by deposits from both individuals and corporations. "In 2002, our total net loan was RM3.3 billion, of which RM2.5 billion was being funded by bank borrowings. In 2006, our net loan was RM5.2 billion, of which our total borrowings made up only RM500 million while the remaining was funded by deposits," he says. "This indicates that the confidence level of depositors has improved," he points out. In 2002, MBSB had 48 million deposits and the number has jumped to one billion deposits today. Moving forward, Farid says MBSB will continue to focus on property financing as well as develop its retail business. It is also aggressively embarking on Islamic financing. In fact, over half of MBSB's customers apply for its Islamic house financing scheme