This article first appeared in The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024

DRB-Hicom Bhd, a conglomerate controlled by tycoon Tan Sri Syed Mokhtar Albukhary, is exploring an initial public offering (IPO) for its banking subsidiary Bank Muamalat Malaysia Bhd, sources familiar with the matter tell The Edge.

Bank Muamalat is 70% owned by DRB-Hicom, while the remaining 30% is held by sovereign wealth fund Khazanah Nasional Bhd. Low-profile businessman Syed Mokhtar has a 55.92% stake in DRB-Hicom through his private vehicle Etika Strategi Sdn Bhd.

Sources say DRB-Hicom has called banks and other financial institutions for a request for proposal geared towards the flotation exercise. Bank Muamalat executives are keeping the information close to their chests.

“The IPO could be [undertaken] for a variety of reasons. It could be because of the requirement to pare down DRB-Hicom’s stake in Bank Muamalat to comply with Bank Negara Malaysia’s requirements,” a source familiar with the goings-on at Bank Muamalat tells The Edge.

Under the Financial Services Act (FSA), individuals are not allowed to control more than 10% of a bank. There were exceptions made, known as the grandfathering rule in the past, as the law only came into force in 2013. But it seems unlikely to be extended to Syed Mokhtar, who has already delayed paring down his stake for many years.

Another source who has heard of the potential flotation exercise says Bank Muamalat was supposed to go for a listing a few years ago, but it was postponed. “If I’m not mistaken, it has been postponed several times. Once was due to subdued market conditions, which made it challenging to fetch a better valuation.”

Should the IPO take place, a conservative estimate of the valuation could be RM2.89 billion,  based on Bank Muamalat’s FY2022 shareholders’ equity and price-to-book value (P/B) of one time.

Bank Muamalat is the country’s third standalone Islamic bank after Bank Islam Malaysia Bhd and MBSB-MIDF. It has more than 60 branches, total assets of RM31.53 billion and shareholders’ equity of RM2.89 billion.

DRB-Hicom bought its 70% stake in Bank Muamalat for RM1.07 billion from Bukhary Capital Sdn Bhd in 2008. The central bank allowed the deal on condition that the diversified group would eventually pare down its stake to more palatable levels. The bank was priced at about 1.2 times book value when the group bought the controlling stake.

A market observer says, “An IPO is a consideration for DRB-Hicom to meet the shareholding require- ment, and could help pare down debts.”

Most banking stocks on the local bourse are trading at a P/B of between 0.5 and 1.3 times. The exception is Public Bank Bhd, which has a P/B of 1.6 times.

It is worth noting that in previous years, there were a few attempts to merge Bank Muamalat with other banks, including one with Employees Provident Fund-controlled Malaysia Building Society Bhd (MBSB) back in 2015, but the deal lapsed due to disagreements over the valuation and control.

Last October, MBSB completed its acquisition of Malaysian Industrial Development Finance Bhd (MIDF) from Permodalan Nasional Bhd (PNB) for RM1.01 billion via issuance of new shares. The final purchase consideration represents a P/B of 0.85 times.

Prior to the acquisition, the last Islamic banking transaction was done in 2013 at 1.8 times book value when BIMB paid RM2.96 billion to take full control of Bank Islam.

Previous attempts by DRB-Hicom to pare down its stake to several financial institutions, namely Affin Holdings Bhd, Bank Islam Malaysia Bhd and Bahrain-based Islamic lender Al Baraka, also failed. It is understood that the deals back then fell through because the group had sought to maintain control of the merged entity and also unrealistically high price expectations.

It is understood that Khazanah has been considering letting go of its 30% equity interest in Bank Muamalat as it sees the stake as a non-core holding.

On the operation side, Bank Muamalat has been working to clean up its books. It has seen a steady improvement in its profitability.

The bank’s gross impairment financing ratio improved to 0.85% in FY2022 from 1.43% in FY2018, while its total assets grew to RM31.5 billion in FY2022 from RM22.89 billion five years ago.

For FY2022, Bank Muamalat registered a record profit before zakat and tax of RM306.7 million, representing a growth of 20.3% from the RM254.9 million in the previous corresponding period. This is on the back of an 18% jump in revenue to RM1.34 billion from RM1.14 billion previously.

DRB-Hicom, which is involved in the automotive, property and construction sectors, among others, considers banking as one of its core businesses. For FY2022, Bank Muamalat accounted for about 8.6% of the group’s revenue of RM15.51 billion and about 47% of its profit.

Home financing makes up the bulk (almost 31%) of its business, followed by personal financing (28%).

DRB-Hicom’s share price closed at RM1.37 last Friday. This translated into a market capitalisation of RM2.65 billion. 

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