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March 13, 2007

YAB Datuk Seri Abdullah Ahmad Badawi

First Finance Minister

Ministry of Finance

Malaysia Treasury, Ministry of Finance Complex

No. 5, Persiaran Perdana, Precinct 2

Federal Government Administrative Centre

62592 Putrajaya



YB Tan Sri Tan Sri Nor Mohamed Yakcob

Second Finance Minister

Ministry of Finance

Malaysia Treasury, Ministry of Finance Complex

No. 5, Persiaran Perdana, Precinct 2

Federal Government Administrative Centre

62592 Putrajaya


YAB Datuk Seri, 


Block Approval Of Purchase Of RHB Bank At A Total Cash Offer Of RM 11.9 Billion Offer Risking Malaysian Workers Contributions Without Any Guarantees Of A Commensurate Returns


We urge the Finance Ministry to review the Employee Provident Fund’s (EPF) acquisition of Rashid Hussain Berhad (RHB), and exercise its discretion to block approval of EPF’s proposal acquisition of a 32.8% stake in RHB for RM 2.25 billion in cash in order to safeguard workers’ contributions. As the final purchase would amount to a cash price of RM 11.9 billion the Finance Ministry should block this venture which risked Malaysian workers’ contributions without any guarantees of a commensurate returns.


1    Upon completion of this transaction, subject to approval from the authorities, EPF will make a general offer (GO) for the rest of the shares and loan stocks in RHB, and a GO at RM4.80 a share for RHB Capital Bhd (RHBCap), a subsidiary of RHB, which owns 70% of RHB Bank Bhd.  If EPF gets full acceptances for its GOs, it would pay out an additional RM6.4bil, making a total of RM8.69bil cash for 70% of the banking group.


Coupled with buying out Khazanah Nasional Bhd remaining 30% of RHB Bank for RM 3.2 billion, EPF would be spending RM 11.9 billion in cash to control RHB Bank. Putting a significant “bet” of RM 11.9 billion into a single investment company for a national savings institution is not prudent.


EPF CEO Datuk Azlan Zainol expressed confidence of garnering a 6% - 7% return on capital over one to two years and 8% to 10% return after that. DAP does not share Datuk Azlan’s confidence and that it is necessary to protect its initial investment in EPF by buying over RHB. Has due diligence being done on the nation’s fourth largest bank that it would generate such returns? By putting all our eggs in one basket, EPF is gambling with our workers’ contributions.


2.    The DAP would like to state that it strongly objects to EPF owning and managing a commercial bank.  Such an exercise deviates significantly from EPF's charter of being a “fund manager”, and becoming instead, an “owner manager”. The acquisition brings about very significant risks to the security of the hard-earned savings by Malaysians for their retirement.


3.    No expertise. EPF has neither experience nor expertise in owning or managing a commercial bank.  While the other competing offers originates from existing banking institutions seeking to enhance and optimise their current branch network to enjoy economies of scale, the EPF will enjoy no such benefit from acquiring RHB at premium prices.


Both the Prime Minister, who is also the Finance Minister as well as EPF CEO, Datuk Azlan Zainol, have argued that they will employ banking professionals to run RHB Bank which EPF has acquired, subject to approvals. In addition to issues relating to higher risks which have been raised earlier, EPF's decision in this case raises a few questions.


4.   Firstly, why does the EPF Board believe that they are the best judge of banking professionals to operate and manage the Bank?  Wouldn't an existing banking institution, with the necessary expertise be a better judge to do so?  Hence wouldn't the interest of EPF and its contributors be better served if another banking institution which has the necessary expertise and experience, has taken over the stake from Utama Banking Group (UBG)?


5.   Secondly, it is worth noting that the EPF Board has no proven track record to speak of, in recruiting the best candidates to operate its own subsidiaries.  In fact, in its 63% owned subsidiary, Malaysia Building Society Berhad (MBSB) which is a financial institution in itself, has performed terribly in recent years.  MBSB is notorious for giving huge loans to politically-connected companies such as to the failed Perwaja Steel Bhd.  One of the key reasons for EPF’s poor investment returns are due to EPF’s involvement in questionable projects and bad loans given out by MBSB.  MBSB is notorious for giving huge loans to politically-connected companies such as to the failed Perwaja Steel Bhd.  In Melaka alone, such bad loans by MBSB amount to more than RM 150 million.


Non-performing loans by MBSB reached a high of RM 4.45 billion in 2002 and is at RM 4.33 billion in 2003.  MBSB achieved the dubious distinction of having the highest non-performing loan (NPL) ratio of 62% amongst all banks in the country, against the banking average of 7.4% in 2002. MBSB’s NPL stood at a of high 41%  at the end of 2004 and 34% at the end of 2005. MBSB lost almost RM 1 billion in profits from 1998-2002, reducing its shareholder funds of RM 1.1 billion to only RM 70 million. If EPF is unable to find the “right” banking professionals to manage an existing subsidiary which suffered such heavy losses, why do the Prime Minister and the EPF board believe that it can do any better for a much larger financial institution in RHB Bank?


6.   Disproportionate Amount of Risks to EPF Contributors. Based on EPF’s total assets of RM300 billion, 21.7 % or RM 65 billion was allocated to Equity investment.  Hence, EPF's RM11.9 billion spent in cash for its RHB’s acquisition venture represents more than 18.3% of its total equity investments. Such disproportionate amount of investment in a single stock clearly represents poor portfolio allocation and diversification.  


7.   Distraction from Fund Management. The acquisition of a Bank by EPF will not only change its charter and increase the risk to the fund contributors, it may also cause poorer performance in its fund management objectives. By redirecting the Fund's attention to the onerous responsibility of owning or even managing a commercial bank, fund management may inadvertently become a secondary concern for the EPF management.


8.   Throwing Good Money after Bad. As it stands, the EPF's existing 31.7% for a reputed sum of RM2.3 billion stake in RHB is worth no more than half that amount today, even after the recent rally in RHB stock prices fuelled by the competing bids for the Bank.  At its low in September 2005, EPF's investment was worth 50 cents per share or only about RM115 million!


9.   Acquisition Followed by Divestment. There is no guarantee that EPF will be able to secure buyers of this substantial stake higher than or at its GO prices. Any negative turn of events in our stock market may very well result in EPF suffering immediate losses if the block had to be placed out at lower than its GO prices. Should the EPF have sought the strategic investor to undertake the GO exercise in advance to mitigate such risks? To a large extent, the EPF is risking a substantial portion of our funds to the whims and fancies of our stock market.


10. Supported by EPF's Investment Panel 'Professionals Representatives'? Finally, it should be noted that EPF's seven (7) member investment panel comprises of three (3) “Professional Representatives”, two of whom are Datuk Amirsham Abd Aziz, CEO of Maybank Berhad, and Datuk Mohammed Nazir Abdul Razak, CEO of CIMB Bank.


Can we confirm if the two (2) key investment panel members are in agreement with the EPF board's decision to acquire RHB Bank? And if not, is the EPF board acting recklessly in its investment process by refusing to take heed of advice provided by CEOs of Malaysia's top two banks?


11. EPF should stick to its charter to prudently manage the retirement funds of Malaysian workers utilising low risk strategies such as a diversified portfolio in equities to generate safe and reasonable returns.


12. The EPF is not an “aggressive growth fund” seeking to generate 30% returns with equally daunting risks in its investment. The EPF is meant to be an income fund to generate reasonable investment returns and protect the capital of its contributors by taking minimal or at most measured risks in its investments.


The EPF's unusual decision to acquire an entire bank at premium prices is unnecessarily exposing ordinary Malaysian workers' savings to a multitude of major risks.  It is also made without sound commercial and financial basis. The returns from its existing 31.7% stake may be better if the bank is owned by another competent financial institution, than if they were to own it in its entirety themselves.


For the above and many other reasons, the DAP urges the Finance Ministry to use their regulatory powers to stop the EPF acquisition from proceeding, preventing possibly another EPF scandal from arising. Thank you.


Yours faithfully,





* Lim Guan Eng,  Secretary-General of DAP

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