Sunday, March 11, 2007

Dear Prudence: Is EPF Purchase of RHB Scandalous?

Dear Prudence, won't you come out to play
Dear Prudence, greet the brand new day
The sun is up, the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

Dear Prudence open up your eyes
Dear Prudence see the sunny skies
The wind is low the birds will sing
that you are part of everything
Dear Prudence won't you open up your eyes?

Look around round
Look around round round
Look around

Dear Prudence let me see you smile
Dear Prudence like a little child
The clouds will be a daisy chain
So let me see you smile again
Dear Prudence won't you let me see you smile?

Dear Prudence, won't you come out to play
Dear Prudence, greet the brand new day
The sun is up, the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

-- The Beatles, White Album (1968)

My first impression to the accusation by Tony Pua, the new Economic Adviser to DAP Secretary General, on EPF purchase of RHB as scandalous seemed alarming (Read in FreeLunch 2020 here). For one with no or limited experiential knowledge in portfolio management and banking, his political statement seemed commendable.

While his headline got me to sit up, I am not easily taken-in in the wake of strange headlines like our RM1 trillion "good" economy these days. Mind you, scandal is synonymous with offense. As I surgically read his statement, I fail to see any conclusive offense made under law or abnormality in industry practise, be it in a professional or regulatory role.

And, to simply prefer EON Capital or Kuwait Finance House to takeover RHB, just because both are financial institutions, is certainly a naïve remark.

Let not nit pick like a lawyer enlisting troubling issues from some textbook checklist.

Fallacy of the Accusation

Behind those liberal uses of technical jargon and numbers, the seven issues are inconclusive, arguable and speculative. Allow me to elaborate below:

1. EPF has humbly recognised their lack of expertise in managing Bank. The management provided by Khazanah. This will assist their process of building expertise within the organisation. As one who attended the courtroom proceeding in the trial against Dato Ismail Zakaria, the presumption of Sime Bank's failure is way of mark.

2. While the 18% exposure of its total equity investment seemed large, it is still a mere 3.5% of total fund under management. Do the scenarios and do the math. Will it significantly impact EPF return? The way the Capital-asset Adequacy Ratio risk is presented, it seemed only a Bank with no loans activity is satisfactory to DAP. And, to apply gearing practise of other business to Banking, it is a serious flaw.

3. For big organisation like EPF, it is within their means to create the structure to manage their investment. Lets not create hearsay that EPF will be distracted away from their decades old core business of Fund Management.

4. On the speculation that EPF is average down investing on RHB, is it not a common investing methodology? Sieving through his arguments that EPF is "throwing good money after bad money" and void of proper judgement, strangely there is too many "if"s. Does that warrant an offensive scandal label? If any, barking at the past does not move one to the future.

5. Regulatory uncertainty occurs when there is no precedent. As it is, there is no Malaysian law limiting ownership of Banks beyond 20%, only Bank Negara Malaysia (BNM) policy regulation. There is a precedent to allow certain Institutions of national interest like PNB to own majority stake in a Bank. And, there has been leeway of time for divestment of shares to Tan Sri Azman Hashim dan Tan Sri Teh Hiong Piow. Where is the regulatory uncertainty?

6. The raising of doubts on the unanimity of the Boards' decision on this acquisition differs wildly from positive remark by Bloggers BigDog on the existence of 3 professional Bankers on the Board (Read here). If there is confirmed inside information on the Board divergence view, it should certainly be shared. Otherwise, it is too speculative to call for an offensive scandal. As all Boardroom practise, decisions are made collectively.

The Bigger Perspective

Right up to the late 80s, the bulk of EPF investment is in long-term Government Bonds of 15-20 years with gorgeous coupon rates of 7.5 - 8.5%. Since the recession of 1986, the Government have progressively reduce deficit and consequently lesser amount of Bond are issued.

Come the 90s as Government was on a balance budget policy, Government Bonds have a much reduced rates commensurting with the shorter tenure. That explains for EPF declining return. For EPF to sustain a growing fundsize and limited choices of investment to meet its fund objective for capital preservation and modest return, and the terms in the deed of trust, investing its funds is a formidable and daunting task.

One investment model that has proven well in Malaysia is PNB, Tabung Haji, and LTAT. These institutions manage their Fund well and manage their invested companies. Even the legendary Investment Guru Warren Buffet of Berkshire Hathaway has his hand on main investment, GEICO. So does, Ross Perot.

Managing your major invested company helps reduce the risk of being railroad by other managing shareholders. This certainly applies in the ruthless Malaysian corporate scene and EPF has fall victim to many such situation.

I certainly welcome EPF move to "take the bull by the horn", should it be the direction it is taking. As compared to investing PFI and Corporate Bonds, it promises a better control on its return. EPF is certainly not without Boardroom experience in control and monitoring of strategic investment, particularly in Banks. In fact, EPF have been managing MBSB from time immemorial.

This acquisition can be bring about many possibilities and opportunities, even cooperating with with the other bidders. The whole sequences of corporate exercises are still not known publicly but it must be made known to BNM. Hold on to your horses.

In the nutshell, this is the dilemma of investment decision - investing or divesting or do nothing. Whatever it is, investment can never be risk free and risk avoidance is impractical. Just balance the risk with expected return.

Here's to responsible bogging and gentlemen agreement to disagree.

The sun is not that gloomy.

Dear Prudence won't you come out to play

A Voice
Kuala Lumpur
March 11th, 2007 4:00 p.m.


Maverick SM said...

Good writeup.

Anonymous said...

good piece. have posted it on my blog. tks for posting it up. this is what i want to encourage not actually a black n white, right or wrong stand but a discussion of views. tks for taking the time to reply.

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Unknown said...


Thanks for the response, I certainly welcome the agreement to disagree. ;)

I won't write an essay here with a point by point rebuttal (I'm sure I'll be answering some of the questions in subsequent statements), but some key points to your post:

1. PNB, Tabung Haji, LTAT are hardly examples of successful fund managers owning banks or companies.

TH owns a big stake in Bank Islam and just end of Nov 05, it announced record RM700m in pretax losses and RM2.2b of non-performing loans. Mind you, the sums are big for a small bank.

Do a search on the Internet on the various misdeeds at TH over the past 10 years or so written up by many many writers.

LTAT owns a big stake in Affin Bank, which underwent major restructuing processes in the late 1990s and early 2000s. It's one of the weakest, if not the weakest commercial bank in Malaysia at the moment.

PNB has it's share of financial scandals, most recently in the 90s being a large allocation to a rogue fund management company which went bust.

2. Is EPF managing MBSB a perfect example of good governance?

If it is, then I have a real case to worry about. MBSB accumulated losses of nearly RM1 billion in the 1980s. As late as early 2000s it was still facing various financial problems. Is that how you expect EPF to manage RHB?

Underlying all my arguments is that there's nothing wrong in making risky investments. But EPF is certainly not the vehicle to make such investments.

And yes, acquiring RHB isn't against the law, and isn't a scandal. But do we want to risk another scandal before we raise our concerns?

Tony P ;)

Anonymous said...

Hear, hear. I wish detractors of blogs will open their eyes and see that bloggers do not wholesale "hentam' establishment. You've presented another view, and argued it well. And I see, tony p has rebutted, and that's what make it interesting. We now have a lively debate, a civilised one sans profanities and name-calling.

regards, okzein

And to jenya: Go elsewhere and play, adults are talking.

mob1900 said...

What you failed to see is, EPF has always been acting as a PROXY for the Gov to 'buy, bail and change' as they pleased.

FAIR RETURNS has NEVER play any part in the EPF. No offense to RHB which to me are one of the better Malaysian banks out there but as you will witness later the true 'power' behind this force 'buyout' of a bank USING OUR FUNDS.

It is NOT about how good this investment is, the question is: Why is the Garmen risking our retirement funds without any after-thought?

If this how our EPF(READ GOV) manages our funds, then expect it to vaporise before the installment of the next gov. Don't you think everytime election nears, our leaders felt like using our funds like it's 'End of Days'?

EPF's hands are tied period, They acted on ORDERS.

Anonymous said...

Congrats to all gentlemen bloggers for this good discussion.

Kudos to Tony for admitting that it is not a scandal. But his parting words to let not it be a scandal is worth pondering.

Nevertheless, Mob1900 shd substantiate your argument and not just based on suspicion.

WHat do we want EPF to do? Invest in riskfree asset? Then ppl complain of the 5.15% return. Isn't that abt aroudn the Bond and FD rates.

Invest in higher return but more risk? Then ppl complaint of the risk.

Any idea how difficult to invest RM200 billion fund. They have to invest in too many asset.

If they dump to say, 40 stocks from say 20% of equity fund. Thats RM1 billion per stock. Is that possible without triggering 33 1/3% GO limit? You knwo how tough to monitor 40 stocks?

Anonymous said...

Bailout or no bailout, EPF has poured billions into a "black hole". It has to be one of the oddest deal any pension fund had made.

Trust me, i have seen enough when I was in RHB. It has biggest work force and layers of deadwood bankers. These are the same people that puts the bank in such a hole.

The only mark they met is their Corporate Image, these top guys flows in with their BMWs / Mercs, tailored suits and first class travels. Dont ask about "substance". Even now, I heard that they are revealing the perks.

As example, my EVP has only an Degree Agriculture from Agriculture University and was trying to bring in corporate deals! His peers were even making fun at him at his back. Likewise with others, their credentials are really surprising and of laughing materials!

To be profitable and competitive, RHB really has an enormous task! The bank's human capital will be the main obstacle. The profesional level and mindset must change. Present time, banking is so sophisticated and bankers has to move at light speed to compete.

EPF is very bold in assuring the public of it's decision. Indeed we are not surprise of what can happen in this country but this time it directly involves our money? Datuk Azlan, can we have some professional credibility here? Of course, you assured that it is a long term investment, by then your are already retired! Best of Luck Malaysia.

Anonymous said...

The real story is that Johari Muid wants to be the MD of RHB Bank

A Voice said...

If any point that I wish to put across here, it would be the messages that:

1. Should we decide or extrapolate the past as an extension of the future? Meaning, do we subscribe to the weak form of Efficient Market Theory (EMT) that the future can be predicted with confidence based from the past? Or the strong form that say not possible?

2. Do we do something or nothing? Doing something gives the chance of a reward. And, it comes with possible problem. What doesn't? Are we seekign to do nothing because we are incapable of solving any problem or the problem is too problematic beyond repair?

So it boils down to people as Withour Prejudice. With Concern. I will agree to that. But again, teh same two message need to be reexplored. THat answer will need to be thrown back to EPF to deliver.

If Rashid Hussain's revelation that its abt Johari Muid's ambition, thats interesting revelation of Johari Muid of PBSB/CIMB that the market is used to. Mind you, he is a very cynical and sceptic man that would be concurrent with the general attitude. What makes him allegedly confident beats me?

IF thinsg screw up again, whack me. And, I'll join you guys to whack at EPF all the way up.

If your sooo sceptic, do withdraw your EPF and either manage it yourself or buy some Unit Trust. Be sure to get the one that is not skimming you from all sides.

Anonymous said...

Well, at least he wants to. Whether he gets the position is a totally different matter. Last year tussle was a tossed up between him and Datuk Wahid Omar. Since Wahid's contract with TM was extended ... it's now just him.

He wants to prove a point to Nazir Razak

Anonymous said...

"Tony P's" note substantiate every reasons why should a no go with EPF/RHB deal but the debate came a little too late.

Disagree with "fun manager", if you have nowhere to put your money, does not mean you burn money to keep warm. Whatever Johari Muid's ambition is shud not bother anyone, it is his right.

The main concern shud bewhat EPF intends to do with the bank after plough in "Billions"? Only morons will be convinced by EPF's statements, it is more like "buy first, think later"! You dont spend "billions" without an overall ambition! The new owner should task RHB compete / synergize with Maybank, CIMB to work beyond our boundries. Imagine the synergies of these 3 big boys with the close watch of BN and EPFs?

We hope EPF will not just "hire & forget" for any "one person" to run the show and expect miracles. Having a new "MD or CEO" will not be sufficient to change the present work culture. Remember the previous CEOs (including a former StandChart head)that had also failed to move anything?

Instead of promising not to interfere, The new owner should not hesitate in considering a total Management revamp. EPF also promised to hire "professionals" and there has never shortage of professional, enthusiastic new blood and this is the time.

Not doing so will be like what "Withour Prejudice, With Concern" had revealed, the same fat cats will be having a ball and the draining continues! Thus, its is the same old RHB on the slide! Skim some fats and open some eyes.

Scandal or no scandal, dont blame the critics for being haunted by Sime Bank and Bank Bumi's experiences. Luckily, the opposition has not made too much noise on this deal (suppose they are too busy trying to bring down other personalities).

Conclusively, EPF should "sport up", roll up sleeves, without fear / prejudice and do what the professional does to suceed. Of course, only with god's willing.

Anonymous said...

Two questions:

1. Why not buy RHB when it was 52 sen a piece, rather than 1.80 now?

2. Why buy a company with 36 billion ringgit in debt?

Answer: not my own money whaaat

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