Government Pension Fund Buys 4th Largest Bank; "Mission

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000592 SIPDIS 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 SIPDIS 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 KUALA LUMP 00000592 002 OF 002 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