Tuesday September 30, 2008

Should Malaysia's Khazanah buy stakes in US banks?

News analysis by Danny Yap

Analysts say it’s not a good idea

PETALING JAYA: It is said that in every crisis there are opportunities. The current volatility in the global financial markets stemming from the troubles afflicting the US financial sector may just reveal such opportunities, especially to non-US financial services groups and sovereign wealth funds, as events in recent weeks have shown.

The sale of parts of US investment bank Lehman Brothers Holdings as well as real estate assets to Britain’s Barclays PLC and Japan’s Nomura Holdings Inc is but a recent example.

Last November, the world’s largest sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), acquired a stake in Citigroup Inc for US$7.5bil.

Besides ADIA, Saudi Arabia’s Prince Alwaleed bin Talal and the Kuwait Investment Authority (KIA) also acquired stakes worth US$500mil and US$3bil respectively in Citigroup.

KIA and Singapore’s Temasek Holdings also acquired stakes late last year in Merrill Lynch & Co Inc, which in turn was recently acquired by Bank of America for US$50bil.

Lehman Brothers investment bank headquarters in on Sixth Avenue in New York. - AP

Are there local institutional investors with balance sheets solid enough that are looking to acquire stakes in US banks? Off hand, what comes to mind is the country’s sovereign wealth fund, Khazanah Nasional Bhd, which has assets in excess of US$20bil.

Currently, Khazanah has a direct 51% stake in Indonesia’s PT Bank Lippo and an indirect stake in PT Bank Niaga via its 20.18% stake in the CIMB group. But, will it even consider acquiring stakes in US banks given the uncertainties ahead not only in the global economy but also in the US financial markets, which are bogged down by a housing slump that has not ended?

It may not even be a good idea since Khazanah is still preoccupied with the merger of its Indonesian banks to comply with banking regulations.

A Singapore-based analyst with a European bank said while stock valuations of US banks were attractive versus the risks, the volatility of global financial markets, coupled with more bad news in the pipeline, might make acquiring them or stakes in them not very worthwhile.

Before local institutional investors look to acquiring stakes in US banks, it will be a good idea to take heed of the home ground as the US financial turmoil has impacted East Asia via tighter funding conditions for the region’s financial hubs.

Citigroup analyst Moh Siong Sim said in a recent report that liquidity strains had broadened out beyond South Korea to the region’s financial hubs judging from the rise in money market rates in Hong Kong and Singapore.

“Both financial hubs are probably hit by similar heightened concerns over counter-party risks sparked by the failure of Lehman,” he said, adding that Citigroup analysts had negative outlook for banks in Hong Kong and Singapore.

Besides East Asia, banks in the European Union have also been hit. Yesterday, Britain’s Bradford & Bingley PLC was nationalised, Germany’s Hypo Real Estate Holding AG was given a 35 billion euro loan guarantee to fend off bankcruptcy and Fortis was thrown a 11.2 billion euro lifeline by the governments of Belgium, Luxembourg and the Netherlands.