During the times when there is liquidity crunch, such as now when there is an impending interest rate hike in US or when there is a stock market rout in the region, what is the most important thing for the banks? Yes, CASH at hand! When there is an extreme liquidity crunch, the banks will tend to play it safe. Whether or not they are going to use it, raising cash is the most important thing to do during such times.
Historically, there were many precedences. During 1998, when there was the Asian Financial Crisis, DBS bought POSB. It was the people’s bank with a huge amount of deposits. The main lending activities of POSB at that time was mainly in secured lending such as housing loans and the deposits at that time was huge.
In the recent global financial crisis in 2008, DBS raised S$4.2 billion through rights issue. Seven hundred and sixty (760) million rights were offered at $5.42c, a hefty discount of 45% from the last day trading price of $9.85. Each right was offered at 1:2 basis, meaning 1 right for every 2 shares owned.
In parallel OCBC went into offering preference shares at $100 per share in August 2008. To sweeten the deal, the dividend was offered at 5.1%, a rate way above bank’s interest rate even until today. OCBC raised $1 billion from that exercise. Following that move, UOB also followed suit with the same offering but at a slightly lower rate of 5.05%. UOB also raised about $1billion from the exercise.
In such times, when people are fearful and cashing out of the stock market, this appeared to be the best time for the banks to raise cash. After all, with bank interest rate at historical low couple with the stock market turmoil, many investors are looking to park their encashed money in safe instruments that offer sufficiently good returns. With the bank’s brand name and offering good dividend payout, it is possible for the banks to raise funds with relative ease.
What do the banks do with those money? Well, during market turmoils is one of the best opportunities for the banks. It is a question of survival of the fittest. Many so-called ‘fantastic companies’ will not be trading at historically fire-sale prices unless during such times. Remember that Astra, was one of the crown-jewel of the Indonesia companies before the 1998 Asian Financial Crisis. It was forced to sell its shares to Cycle and Carriage (C&C) before C&C was taken over by the Jardine group. If the shares of Astra had not been sold to C&C, Astra would not have been in existence or could have been disintegrated into smaller companies. Who knows Danamon Bank in Indonesia may be up for sale once again with better selling conditions. The last time, when the deal fell through was in 2013, when the Indonesian regulators allowed only to a maximum cap of 40%. DBS, on the other hand, was looking into acquiring 67.37% (for a price tag of $542.4m) which will ultimately trigger it to make a take-over offer of the bank.
Shareholders, in particular those who hold blue-chips, should maintain your liquidity now. You may be put in a situation to acquire rights or preference shares at a steep discount. Perhaps if you look at it in a long-term basis, it may not a bad deal. When the good times come back again, maybe you are rewarded with 500 DBS shares or 1000 OCBC shares as dividend in its yearly dividend distribution exercise.
(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.