Why is DBS – Southeast Asia’s largest lender – seeking a stake in one of Malaysia’s smallest banks?

FRESH CONSOLIDATION AHEAD?

The DBS–Alliance Bank proposal may take up to six months to complete due to regulatory and shareholder approvals required, bankers said. 

They added that DBS’s entry could trigger a fresh round of consolidation in Malaysia’s banking sector, with particular attention on the two remaining Chinese-controlled banks: Public Bank and Hong Leong Bank.

When the FSA was introduced in 2013, it capped individual holdings at 10 per cent and institutional holdings at 20 per cent. However, a “grandfather clause” allowed founding shareholders to maintain larger stakes for their lifetimes — but these could not be passed on to heirs.

In the case of Public Bank, the family of the late founder Teh Hong Piow announced in 2024 that it would gradually reduce its roughly 22 per cent stake to 10 per cent over five years. The Teh Estate has since begun paring down, with its stake now at 21.23 per cent.

Tycoon Quek Leng Chan, 82, who controls 64.4 per cent of Hong Leong Bank, has yet to publicly indicate how he will address succession issues.

With DBS entering the picture, merger and acquisition bankers say Hong Leong Bank could become a target for Maybank or CIMB. A merger with either would create a financial powerhouse capable of challenging DBS.

Maybank, CIMB and Hong Leong Bank currently have assets of US$216 billion (RM1.08 trillion), US$182.74 billion (RM754.7 billion), and US$74.74 billion (RM308.7 billion) respectively.

Public Bank, with assets of US$129.9 billion, could instead become a merger candidate for RHB Bank, a slightly smaller state-controlled lender with US$85.74 billion in assets. 

Both Public Bank and RHB share a common shareholder in Malaysia’s Employees Provident Fund (EPF), and a merger between them would resolve long-standing shareholding concerns flagged by BNM. 

BNM has long been uneasy about EPF’s dominant 37 per cent ownership of RHB and bankers close to the situation said that the central bank has been pressuring the pension fund to gradually reduce its holdings. 

A merger could potentially be through a share swap, which is when one company acquires another by exchanging its own shares for the target company’s shares, using equity as currency instead of cash. 

With Public Bank bigger than RHB, a merger could potentially result in a dilution in EPF’s deemed holdings in the merged entity. 

BNM’s concerns stem from the potential risks to EPF’s investment should RHB suffer from hits due to banking-sector turmoil or swings in the bank’s financial performance, bankers said.

Following the orderly sell-down by the Teh Estate’s holdings in Public Bank, EPF has been slowly raising its own holdings in the bank to roughly 18 per cent currently. 

“The dominant positions EFP has in both banks, makes a merger a natural fit and even with Alliance in the mix,” said one veteran stockbroking executive, who knew the late Teh well. 

EPF, which at one time held almost 10 per cent of Alliance, has cut its stake to just under 5 per cent currently.