Government Pension Fund Buys 4th Largest Bank; "Mission

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STATE PASS USTR - WEISEL AND JENSEN
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
USDOC FOR 4430/MAC/EAP/J.BAKER
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR

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E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Government Pension Fund Buys 4th Largest Bank; "Mission
2057" Launched: Malaysia Economic Update for March 2007


1. (U) Summary: Malaysia's state pension fund was the winning
bidder for the country's fourth largest banking group, prevailing
over a competing bid that was significantly higher. Critics claim
the fund lacks the expertise to operate a commercial bank.
Meanwhile, Malaysia's ruling political coalition announced "Mission
2057", a plan to ensure the country's continued development after
"Vision 2020", the country's current development goal of becoming a
fully developed nation by the year 2020, is achieved. End Summary.

Pension Fund Buys Bank; Not the Highest Bidder
-------------- -


2. The Employees Provident Fund (EPF),Malaysia's state-owned
pension fund, emerged as the winning bidder for control of Rashid
Hussein Bhd (RHB),Malaysia's fourth largest financial services
group, beating out competing bids from Kuwait Finance House
(Malaysia) Bhd, a foreign Islamic banking group, and EON Capital
Bhd, a smallish Malaysian banking group that owns EON Bank. Utama
Banking Group Bhd (UBG),RHB's major shareholder, accepted EPF's
revised offer of RM 2.25 billion (USD 651 million) for its 32.8%
stake in RHB on March 8. The deal is subject to shareholder
approval and regulatory approvals from the Ministry of Finance and
Bank Negara.


3. UBG's move surprised investors because EPF's offer was 6% less
than the RM 2.39 billion (USD 692 million) that EON Capital had
offered for the same shares. The acquisition will increase EPF's
stake in RHB to 63.5% from its current 30.9% ownership. RHB owns
64.61% of RHB Capital Bhd, which in turn owns 70% of RHB Bank Bhd.,
a large commercial bank. EPF plans to buy out the remaining 30%
stake in RHB Bank from the GOM's investment arm, Khazanah Holdings,
within the next three to four months for RM 3.2 billion (USD 914
million). If successful, EPF will have full control of RHB Bank.


4. EPF CEO Azlan Zainol said EPF's increased stake in RHB will
protect the fund's existing interest in RHB and allow EPF to
maximize its returns on capital. EPF expects a return of 5% to 6%
return on its investment in the first two years, in line with the
fund's annual dividend policy of 5% over the next two years. After
the takeover, Azlan said EPF plans to de-list RHB from the Bursa but
keep RHB Capital listed. It would then dispose 35% of its stake in
RHB Capital within two years to strategic partners, possibly foreign
institutions, who would help EPF manage the bank.

A Good Investment?
--------------


5. EPF's intention to take full control of RHB Bank has raised
concerns. Analysts are skeptical of EPF's ability to manage a
commercial bank, noting that EPF has lost money before when trying
to manage the Malaysia Building Society Bhd, a home mortgage
institution, which nearly went bankrupt. Others prefer to call
EPF's acquisition a bailout because RHB is currently RM 3.6 billion
(USD 1.03 billion) in debt and EPF's cash offer will effectively
alleviate RHB's cash flow problems. EPF is already the
second-biggest shareholder in RHB, having initially invested in it
during the Asian Financial Crisis in 1998 to rescue the bank from
collapse.


5. The Democratic Action Party (DAP),Malaysia's largest
opposition party, has come out strongly against the acquisition. In
opinion pieces in the local press, Tony Pua, economic advisor to the
DAP Secretary General, has argued that EPF has neither the
experience nor the expertise to own and manage a commercial bank and
that the acquisition will risk workers' retirement saving by having
the pension fund bet heavily on a single large investment. Pua said
there is also the risk that EPF, acting as the owner of the bank,
will be committed to pump in additional EPF funds to "rescue" the
Bank in the event of another financial or banking crisis and that
EPF management's attention will be diverted from their primary
responsibilities of looking after workers' retirement savings to
owning and managing a commercial bank.

Mission Improbable?
--------------


6. Separately, the Supreme Council of Barisan Nasional (BN),the
political coalition that has ruled Malaysia since 1973, announced
that the country will embark on a new challenge, "Mission 2057", to
ensure continued development and after "Vision 2020", Malaysia's
current goal of becoming a fully developed country by the year 2020,
had been achieved. Prime Minister Abdullah Badawi said "Mission

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2057" would become the development guideline for another 50 years.
He added that in formulating this long-term mission the GOM wanted
the people, including opposition parties, women, young people,
professionals and NGOs, to discuss and provide views for the
country's future. "Fifty years is not that far off that we cannot
see things ahead. The mission will continue from where Vision 2020
left off," he said.


7. Vision 2020 was introduced by former Prime Minister Mahathir
Mohamad in 1991 during a period when Malaysia was experiencing rapid
growth. Since the Asian Financial Crisis, however, Malaysia has
experienced much slower annual growth rates, causing some critics to
doubt whether Vision 2020's goal of an economy eightfold stronger
than Malaysia's economy of the early 1990s will be achieved in time.
Lim Kit Siang, a prominent leader of the DAP opposition party, said
"it sounded a rather tall tale that the BN Supreme Council met
yesterday to take the policy decision to formulate Mission 2057 when
it is ... dubious that Vision 2020 [can] be achieved ..." He added
that Mission 2057 gave "the impression that Vision 2020 is no longer
important."
SHEAR