This article first appeared in The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

THE beginnings of CIMB Digital Assets Sdn Bhd (CDA), where CIMB Group Holdings Bhd’s digital businesses and ventures are parked, can be traced back to the need to go beyond traditional banking as the industry faced the onslaught of digital disruption, stricter capital requirements and thinning margins in the mid-2010s.

The impact had been evident from falling returns on equity (ROEs): For example, while some banks’ ROEs hit the 20% range in 2008, others later saw theirs tumble to a low in the 4% range in 2015, thereby causing many to accelerate their digital push. The average ROE recovered to about 7% in 2020 but is still a far cry from what it was more than a decade ago.

CIMB Group had spent a year — towards the tail-end of its T18 strategy implementation — figuring out what it needed to succeed in the future, says CDA CEO Effendy Shahul Hamid, who has been with the banking group for 18 years.

“Obviously, one of the postures was to ensure that we are more digital as a franchise so that we are ready to take on the long form of banking and the narrative that came with it,” Effendy tells The Edge in an exclusive interview.

“A lot of banks do one part, and that part is improving internally. It is not that it’s not important, it is very important, but doing that is ‘hygiene’ and would not allow you to differentiate. As such, one also had to do more.

“What we decided was that of course [we were] going to do that [digitisation] internally, but we also said we should start incubating and creating some businesses slightly on the outside, and have a digital and ‘future banking’ DNA that, hopefully, will add intrinsic value to the bank — and that is CDA, our differentiator.”

Four businesses — Touch ’n Go Sdn Bhd (TNG), a wholly-owned unit of CIMB Group; TNG Digital Sdn Bhd (TNGD), which started out as a joint venture between Ant Group and TNG; CIMB Philippines; and CIMB Vietnam, which are digital banks today — were parked under CDA.

“When Datuk [Abdul] Rahman came into CIMB [as group CEO] in 2020, he took it one step further, saying that we should ‘portfoliorise’ CDA — think of it as a portfolio — so that it can operate in a more succinct and relevant manner to give it the best chance of value creation. That was essentially the genesis of the CIMB Digital Assets that you know today,” he says.

The four businesses in CDA have been incubating for three to five years as a portfolio. As a whole, they are still loss-making — or, as Effendy puts it, in “investment mode” — but some are already profitable or “almost there”.

He explains that, with these businesses, one would need an investment period for growth and, after that, hopefully, they will perform in two areas — first, by becoming significant contributors to the bottom line; and, second, by becoming valuable in their own right such that, from a valuation perspective, they could accrete value to CIMB.

Asked about the timeline for CDA to accrete value to the group, Effendy says it is an ongoing process that will take time, as they are only three to four years into the journey.

“There are a few things here [when it comes to value accretion]. Quantitative levers are one, but qualitative points are as important. For example, one of the issues facing most banks today is the ability to acquire customers. The CDA segment has the highest new customer acquisition rate in our banking group today.”

Published numbers show that TNGD has about 16 million registered customers, of whom more than five million are monthly transacting ones, while CIMB Philippines has more than four million customers.

“So, if you take those two customer acquisition numbers alone, you will understand from an acquisition rate perspective, it is probably the highest. Through the Covid period, the CDA franchise probably added more than 10 million active customers, and this is an extremely valuable lever to any financial services group,” Effendy says.

In terms of earnings, CDA was the second-highest contributor to CIMB Group’s profit before tax in FY2020 at RM587 million.

However, without the exceptional gain of RM1.16 billion arising from the deconsolidation of TNGD, CDA was the smallest contributor to the group with RM869 million in FY2021.

“In 2020, it was ranked higher because the other businesses took some serious provisions. And, in 2021, the businesses returned,” Effendy explains.

Today, CDA is still in a net loss position because most of its businesses are new but, over a period of time, the losses will narrow, says Effendy.

Nevertheless, he acknowledges that “at some point in time, all businesses must be profitable” and he believes an “effective customer acquisition is a pathway to that”.

Surely one cannot bleed indefinitely, so what is this “point in time”? It is different for different businesses, Effendy replies.  “For example, TNG is profitable. The TNG eWallet is not yet profitable. The concept of profitability is different for separate businesses (see “TNG Group’s digital banking play”),” he says.

While Effendy is confident of the path to profitability, he declines to commit to a specific timeframe.

As for CIMB Philippines, CDA will decide by year-end whether to continue the investment regime for a while longer or turn profitable more quickly.

“There are implications to these decisions and we need to be conscious about which path we choose.

We also have an eye on Asean digital bank valuations and these are looking interesting and will weigh on the decisions we will take. The Philippines is a market with potentially very good scale. Combine that with our DNA and the willingness to ‘partner to win’ — I feel good about the prospects,” he says.

CIMB Philippines’ digital bank now has 5.1 million customers and had a deposit book of RM1.29 billion as at December 2021.

Data shows that, as at last October, 41 million banked adults, or 53% of the demographic, already had digital transaction accounts in the Philippines. Nevertheless, the World Bank had warned that global economic recovery may be at risk of “financial fragility”, citing a rise in non-transparent debt as a reason. The Philippines was cited as a country in which bad debt was becoming a problem.

Effendy says this issue exists not only in the Philippines but in every country CIMB Group operates in; thus, the ability to control credit charges is key to ensuring the success of the unsecured consumer lending portfolio.

“In the Philippines, given our strong deposit base, we have been carefully scaling out the loan book, and until now, operate in fairly modest loan-deposit ratios. So, that’s the first defence — we have not been in a rush and, as a result, have had time to really identify customer segments and associated behaviours.

“In addition, we have been able to implement effective alternative underwriting models to ensure an optimised portfolio model. This is facilitated by the fact that CIMB Philippines was born 100% on the internet and that we brought in customers with our platform partners, including GCash.

“And, finally, the profitability of a consumer lending portfolio does not hinge on credit cost alone but also on the ability to operate this franchise at the right operating cost levels. Given our history (and zero physical asset base), we hope to be able to optimise the [operating expenditure] lines and have a visible line of sight to a healthy [profit-and-loss] trajectory.”

CIMB Vietnam, on the other hand, started as a conventional bank but, in 2018 or 2019, CDA decided to make it digital. The last couple of years was spent reorganising CIMB Vietnam and involved, for example, exiting non-consumer segments, giving it strong digital capability and ensuring that it has the right capabilities, systems and people.

Last year, in partnership with several ecosystem providers, the franchise acquired a record number of customers.

“We have ambitions for Vietnam, and we want to build a large business in what we believe to be one of Asean’s most important growth markets. I am sure we’ll get there, but we know we’re not going to get there the traditional way. We will need out-of-the-box thinking, ecosystem-style connections, and we will need to be ready to facilitate those as we progress,” Effendy says.

While digital is clearly the way forward for many today, including CDA, challenges remain, especially when it comes to turning in a profit.

The way technology and finance-based technology are built today, it is no longer binary, Effendy points out.

“Something has to give — customer acquisition at the expense of profitability or vice versa.

“But don’t get me wrong; these businesses require time to grow and, with the stable of businesses that we look at, our initial thesis is usually four to five years from inception.

“We try to do it sooner or later; anything too soon can disrupt the mechanics of the business,” he notes, adding that CDA is on track to being a net profit contributor to the group in three to five years.

Effendy says CDA is “open to taking on more partners across its businesses”, as he believes the ability to derive synergies and use different capabilities will be critical to success.

He declines to comment, however, when asked whether these partnerships would involve equity or commercial partners.

“For digital businesses to succeed, we need to partner up. Sometimes, doing things with other people is better than doing things yourself. And we will need to figure out how to do this in the context of our business in CDA, in the regulatory environment,” he adds.

CDA’s holding company, CIMB Group, is regulated by Bank Negara Malaysia whereas its units such as the digital banks in Vietnam and the Philippines are under the purview of the central banks in the respective countries. TNGD’s products are also under the regulatory purview of Bank Negara and the Securities Commission Malaysia.

What about partnerships through consortiums? Are consortiums — be it equity or commercial — in technology businesses important? “Yes, they are, because they bring a different kind of skill set,” he says.

On whether CDA is looking at consortiums for its various businesses, he says: “Never say never, but it depends on which businesses we are talking about.”

He says CDA is always in “discussions” that it feels would make its businesses more efficient, but he declines to elaborate.

The most recent partnership that CDA entered into was with AIA Bhd, where the insurer made a minority equity investment in CDA’s TNGD, the owner of Touch ’n Go eWallet, in July 2021.

theedgemarkets.com reported last year, quoting sources, that AIA’s participation in TNGD valued the latter at around US$700 million (RM3 billion).

Besides AIA, TNG and Ant Group, New York-based investment firm Bow Wave Capital Management (via ASP Malaysia LP) is also a shareholder of TNGD.  

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