Maybank revives sub debt plan

The Federation''s largest bank sends out an informal RFP (request for proposals) for a new international subordinated dollar bond.

For the third time in as many years, Maybank is considering raising up to $300 million from the international subordinated debt markets and observers believe there is a high probability it will go ahead with a transaction by the end of May at the latest.

A new treasury team is said to be keen launch a 10 non-call five, lower tier 2 issue and although officials have been canvassing pricing levels for a number of months, they have now accelerated the process by asking relationship banks to respond with proposals for a specific structure. These banks include: Barclays, Deutsche, HSBC, JPMorgan, Morgan Stanley and Salomon Smith Barney.

The last time Maybank sought proposals for a similar structure in the summer of 2000, it eventually decided to revert to the loan market with a Standard Chartered and Sumitomo led deal. Then again in early 2001, the bank considered a dollar deal, but instead opted for the domestic bond market where it could source cheaper funds. It subsequently launched an M$610 million ($160.6 million) issue due May 2011, with a five-year call option in May 2006 and coupon of 5.65%.

Pricing considerations, however, are now said to have swung back in favour of the international markets and observers say there are a number of reasons why Maybank wants to raise dollar funds. Firstly, although the bank's capital ratios remain strong by international standards, they are now at their weakest level since the Asian crisis.

At Year-end June 1997, for example, the bank reported a total CAR of 14%, rising to a high of 15.16% at Year-end 2000 and closing December 2001 at 13.29%. Of this latter figure, tier 1 capital amounts to 9.49%. ROE (return on equity) ended the calendar year at 13.8%

"With consolidation in the Malaysian banking sector continuing to be pushed forwards by the prime minister, the bank may well want a further buffer in case it needs to expand further and take over another domestic competitor," says one bank capital expert.

Maybank is also renowned for an extremely conservative stance towards non-performing loans (NPLs). However, since the overall ratio continued to rise over the latter half of the 2001 calendar year, the bank could well be preparing to write more down. Between December 2000 and December 2001, gross NPL's rose 42.7% from 11.1% to 15.8%.

Most of the figure results from the consolidation of PhileoAllied Bank and Pacific Bank into Maybank's accounts. Neither of the two smaller banks had previously followed Maybank's lead in classifying loans on a three-month past due basis, but had stuck to the regulator's six month minimum. Maybank has also traditionally provisioned against any shortfall of collateral value upfront, although its overall loan loss reserve cover has fallen from an 81% to 85% level throughout the Asian crisis, to a current level of 68.9%.

Observers also suggest that Maybank would like additional dollar capital as its outstanding international deal has started to amortise for regulatory capital purposes. The $250 million 7.125% September 2005 issue for Maybank New York is currently trading on a bid/offer spread of 278bp/265bp to yield 5.8% bid.

At these levels, it is the highest yielding instrument in the Malaysian tier 1 universe and has been consistently compromised by a non-investment grade rating of BB+ from Standard & Poor's. Moody's by contrast has a subordinated debt rating on the issue of Baa2.

As a result, the deal is trading wide of Petronas and Telekom Malaysia, both of which have 2005 transactions outstanding. The former has an August 2005 issue bid at 5.07% on a Treasury spread of 205bp and the latter, an August 2005 at 5.32% or Treasury spread of 230bp bid.

Outside of Malaysia, the best comparables are probably the Hong Kong banks, with both Bank of East Asia and Citic Ka Wah (CKW) having issued 10 non-call five lower tier 2 debt last year. Baa3/BBB- rated CKW has a July 2011 issue bid at 7.5% on a spread of 328bp over Treasuries and Baa2/BBB rated Bank of East Asia, a February 2011 issue bid at 6.3% on 210bp over Treasuries.

Domestically, analysts paint a mixed picture of Maybank. Some remain concerned that while NPLs may have peaked, they are consolidating rather than declining. Others highlight that a recent 5.5% increase in second quarter profit came from lower quality non-interest income.

ING Barings analyst Tay Chin Seng also concludes, "My main issue is with loan growth. Now that Maybank has a much larger M$90 billion loan portfolio, it will be hard to grow it further. At the moment everyone is pinning their hopes on increased economic growth over the second half of the year."

On January 1, the government cut its economic forecast from 5% to 3% this year.

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