Public Bank's LPI Capital purchase may boost earnings, ROE

MGO is unlikely to be accepted by shareholders due to its ‘steep’ 25% price discount.

Public Bank’s surprise purchase of LPI Capital has the potential to lift the group’s earnings and return on equity, according to an analyst.

In October 2024, Public Bank announced the full cash acquisition of a 44.15% stake in LPI Capital from the estate of the late Tan Sri Teh Hong Piow and Consolidated Teh Holdings. 

The $401.27m (RM1.72b) acquisition may lift Public Bank’s earnings by 1.5%, and raise return on equity (ROE) by 20 basis points to 12.7% after accounting for forgone interest interest income, said UOB Kay Hian analyst Keith Wee Teck Keong.

“Although the acquisition is likely to reduce group- and bank-level CET1 ratios by 50-70bp, they should still remain at comfortable levels of 14.6% and 13.1% respectively, above the internally guided thresholds of 13% and 12%,” Wee said.

Public Bank should also be able to retain its dividend payout ratio forecast of 55%.

“Overall, the immediate financial impact is expected to be neutral to slightly positive,” Wee added.

Shareholders unlikely to accept MGO
The acquisition also triggers a mandatory general offer (MGO) with the opportunity to buy the remaining stake. 

The ‘steep’ 25% discount of the proposed RM9.8 per share for LPI is unlikely to be accepted by minority shareholders— meaning, Public Bank is likely to just get the 44.15% stake, according to Wee.

“Consequently, minority shareholders are unlikely to accept the MGO, leaving Public Bank with a 44.15% stake in LPI. However, with management control, Public Bank has indicated that it will be able to consolidate LPI’s financials,” Wee said in a report.

On a separate note, the Teh family is reportedly looking to gradually reduce its stake in Public Bank to 10% from the current 23.4% over the next 5 years, the UOBKH report stated.

“We view this potential stake reduction by the Teh family positively for two reasons: it eliminates a key uncertainty, and the 13.4% stake sale will be spread over a five-year period, alleviating concerns about a potential share overhang,” Wee wrote.