By P. Gunasegaram
Tiger is no fan of private placements for public companies. You can distribute up to 15% of shares to anyone you like, just to friends if you feel like it, making mincemeat of the equal access concept and diluting existing shareholders’ interest. But as such placements go, CIMB Group’s is better than most. Why the price fall then?
Indonesia, where Tiger’s cousin, the Sumatran lives almost equally threatened, is no place for a pansy to be doing business despite a large market which is growing rapidly. Opportunities come with danger and it is necessary to react to dangerous situations with the alacrity of a cat.
So it is easy to understand why CIMB Group, the second largest banking group in the country after the Tiger bank, Maybank, and which earns about a third of income from Indonesia moved to strengthen its capital position in the wake of the depreciation of the Indonesian rupiah.
What probably happened was that capital requirements came under pressure in ringgit terms because of Indonesian operations and there was a need to remedy this in a bit of a hurry. And that was what CIMB did — it raised RM3.55 billion in matter of days.
It issued 500 million shares equivalent to 6.08% of its enlarged share capital at a price of RM7.10 per share, equivalent to a narrow 2% discount to the volume weighted average price traded on Friday, Jan 10 of RM7.26.
Nazir Razak
“We are delighted to have been able to expeditiously raise such a substantial amount of common equity tier 1 (CET1) to bolster our capital position. While we have always sought to operate at optimal capital levels, the sharp depreciation of the Rupiah over 2013 has set back our capital accumulation plan. We have acted decisively to reposition our capital for growth,” said Nazir Razak, the group chief executive.
“With the new capital we stand strong to face any future volatility in financial markets and can continue to grow our business at our desired pace going forwards,” he added.
The new issue lifts CIMB Group’s CET1 as at Sept 30, 2013 from 8.2% to approximately 9.7%. The new equity was placed to domestic and foreign investors over the course of the working day on Monday, during which the stock was suspended from trading on Bursa Malaysia. The offer was well oversubscribed and enabled CIMB to increase the deal size by 25% from 400 to 500 million shares.
In early trading today, the stock dropped by nearly 5% before recovering to a loss of about half that in the afternoon, trading slightly above the issue price of RM7.10.
That there are issues in Indonesia cannot be denied especially with the rupiah weakening. That means two things — in ringgit terms the CET1 reduces because of CIMB’s exposure to Indonesia and so do the earnings contribution from Indonesia in ringgit terms.
The extra margin of core capital puts CIMB in a better position to expand and take opportunities that come its way, but one must expect that the mood now is cautious and growth must be at a respectable pace.
While the share base for CIMB has been expanded by about 6%, this need not necessarily result in an earnings dilution if the increased capital base results in a higher than normal pace of expansion of business through increased lending for instance. Currently that may be unlikely considering the rupiah depreciation.
If high earnings growth does not come by, that is likely to be because of a downturn in business conditions and a more difficult operating environment, particularly in Indonesia. In that event the increased capital will better enable the group to weather downturns.
Tiger is well aware that new territory is more dangerous than the original roaming grounds with danger lurking around every bush and patch of lallang. Tigers routinely seek new territory to get to safer grounds, further away from marauding human beings — the greatest danger of all.
And sometimes corporations do the same, they venture further afield in the name of diversification of the income base where a downturn in a one area is expected to be smoothed over by an upturn in another.
Also they are seeking bigger markets which are growing more rapidly. This means that such markets, although large may be starting from a lower base, usually fraught with much more risks than highly developed markets. Tiger says “usually”, because as we all know too well from recent events even developed markets are not immune to meltdowns — the risk caused by greed.
But the process of diversifying in search of lower risk is itself fraught with risk — until you have a base which is diversified enough the early part of the process may entail getting into an area which has lucrative margins and high growth but high risks accompanying it as well.
As Tigers we are only too aware that moving away from home has its rewards — and its dangers. To quote the humans, its a jungle out there although Tiger considers the jungle — the deeper the better — to be much safer than the cities.
GRRRRR!
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