'We are a long-term investor'

ABU Dhabi Commercial Bank (ADCB) yesterday signed an agreement to buy a 25 per cent stake in RHB Capital Bhd from the Employees Provident Fund (EPF) for RM3.876 billion. It was the largest investment so far by a Middle East investor in Malaysia's financial sector.

ADCB chairman Saeed Mubarak Rashid Al Hajeri sat down with the Malaysian media before the signing ceremony in Putrajaya yesterday and explained the rationale behind the deal and what lies ahead for RHB Capital. Here are excerpts from the press conference.

Question: What is it that attracted ADCB to RHB Capital and what value can you add to the bank?

What attracted us to RHB is the restructuring story that it is going through. We think RHB Capital's potential is much bigger than what it is today although it is already the fourth largest bank here. We like its plans to double profit by 2011.

We also like the Islamic banking aspect of Malaysia in general. We think RHB Capital's initiatives will give us a huge window in Islamic banking. We are starting to expand our Islamic banking. RHB Capital is more advanced than us.

We can bring huge exposure to potential business through ADCB to RHB Capital. RHB Capital can benefit greatly from our relations and our potential access to clients.

At the same time, we can also bring our experience in restructuring. The sizes of the two banks are very similar. Because of our size and cultural similarities, I think the restructuring story of ADCB is more relevant to RHB Capital than that of a bigger bank like Citi or HSBC.

Also the dynamics of Malaysia. In the last 10 years, GDP growth and banking system have been very stable and seen steady growth with huge potential going forward. I think the story in Malaysia is very attractive to a lot of investors and we are very privileged that we are accepted as an investor in Malaysia.

We know there is huge demand for these shares and a lot of investors globally are looking at Malaysia, especially in the financial sector.

Q: What kind of benchmarks have you set, in terms of performance?

We look at several indicators, most important of course is return on equity (ROE). We think that RHB Capital can easily increase ROE to reach a minimum of 20 per cent in the mid term, that is, three years. Our rough analysis indicates that this is possible.

If you look at the banks in Malaysia, the range is 15 to 20 per cent. Our goal is that RHB Capital will be in line with other banks. That's the first benchmark. Once you reach that, the second benchmark is to start to outperform others.

Their plans are very attractive - doubling profit in three years. It is very aggressive but possible. My personal belief is that they will reach that easily. They can, if they implement what they have in hand, without the Abu Dhabi business, the sukuk market. These are complementary.

Q: What are the factors that will contribute towards RHB Capital's plan to double profit in three years? Will it be organic growth or will there be mergers and acquisitions (M&As) as well?

Maybe M&As, but mostly, the plans we are talking about is more efficiently running the business. Driving efficiency within has a huge potential in RHB Capital. We've seen it. We were a very similar fragmented organisation. There is a lot of synergies in the organisation that could be utilised. There is a lot of duplication. I think the EPF plans for RHB Capital are very positive.

I am very confident they can deliver. All they need is the support of other shareholders on the board. We're in line. We like their plan. We have done something similar before. Our senior management, our CEO and deputy CEO, will be on the board. We are not bringing a junior staff from ADCB. This is a very high level, very important initiative for us. The doubling of profit doesn't assume inorganic growth like expansion in Asia or buying an asset outside.

RHB Capital is below other banks in terms of efficiently managing the bank. As soon as that happens, the value you can extract by just increasing your standard to peers will be huge.

Q: RHB Capital is the fourth largest banking group in Malaysia. I'm sure you have aspirations to challenge the other three banks for top place?

The goal for RHB Capital is much bigger than that. The goal for RHB Capital is to become the number one bank in Southeast Asia. We will support that. We will cooperate to achieve that. That may be a 10-year goal, but when you have an aspiration like this, the potential to do it, given the size of the bank, is there. If they efficiently manage the balance sheet, focus on organic and inorganic growth, you can achieve that in 10 years.

Q: Can we expect a string of acquisitions in the near future?

Maybe, at a later stage. The focus (now) is organic growth. Valuations in other markets are a bit on the expensive side when you look at the price-to-book value. When you do acquisitions, it's very important to be careful not to destroy value for your shareholders.

I am a full-time employee of the Abu Dhabi Investment Authority (ADIA), so I'm an investment guy. I think for any investment, valuation is very important.

Q: Your acquisition of the stake in RHB Capital is more than two times the book value, a substantial premium. What is your benchmark when deciding to invest?

True, relative to RHB Capital's price, it looks like a huge premium. But if you look at a list of banks and the price-to-book value around the region, the average will be around 2.0 to 2.3 times. Malaysia is maybe lower than (others in) the region. That's what makes Malaysia more attractive than the others. If you look in Pakistan, deals are done at five times book value. In Mina (UAE), four to five times. The story is similar across Asia. Malaysia is cheaper than all the Asian and Middle Eastern banks.

We know that today, the efficiency in RHB Capital is below market. In our assumption, we look at future value. That's why we're not investing to make a quick buck or short-term profit. We're a long-term investor. We see this as a "buy and hold". We don't want to get out of RHB Capital.

When we look long term, the price to book, is very, very cheap. Do not be surprised if in the short to medium term the re-evaluation of RHB Capital will come by the enhancement in book value. At the same time, the market will reflect that in the price.

Q: How do you plan to take on the competition in Malaysia? Where is your edge?

RHB Capital's ability to capture on ADCB's networking and international sukuk market ... I don't think the others can provide that. We have a captured market. We have all these businesses lined up to be captured by both ADCB and RHB Capital. We can structure a vehicle where 50 per cent of the sukuk market goes to RHB Capital, because we cannot take everything in our balance sheet.

We can syndicate huge sukuk loans which today in the UAE market are captured by people like Barclays. It's a shame, that Barclays and HSBC structure a sukuk product in UAE and then sell it to the local banks.

Q: Why aren't the banks in UAE able to capture this market?

It's the people. One of the best reasons we invest in Malaysia is because of the talent. People in Malaysia are very advanced in Islamic banking.

Q: Banks like Kuwait Finance House and Al Rahji are attracting a lot of talented people by offering top money. Are you going to do the same?

I think compensation needs to be adjusted to performance, in order to retain good people. One of the biggest risks on Malaysia is losing top brains. You need to compensate relative to the market and performance.

This is a practice we did in ADCB five years ago. The top 10 per cent talent of the bank never left in the last five years. We are very proud of this because we have the right compensation of retainer policy, development, and training.

In Malaysia you have the talent. The question is how to retain talent, and how to keep them happy. Because a happy person works better than a sad person. It's simple. Hopefully that is something we will bring to RHB Capital.

Q: You are taking 25 per cent stake in RHB Capital...

Yes, we'd love to take more.

Q: Would you be open to another foreign partner coming in?

Yes of course. A partner that can add value, and we leave that decision to the central bank of Malaysia, which has been very helpful in the whole process. (Tan Sri) Dr Zeti (Akhtar Aziz) is one of the well respected figures globally in banking. She has developed the central bank to be at the highest standard.