Four years ago, Datuk Seri Nazir Razak declared that the CIMB banking group’s ambition was to become Southeast Asia’s most valued universal bank. “We aspire to be a regional champion,” he said in 2006.
The response from his competitors and industry observers was that it was arrogant talk and that he would fall flat on his face.
One cannot blame the cynics because it was indeed a lofty goal. CIMB was not even the largest banking group in Malaysia and it was already talking about taking on the region and becoming a champion. Could it compete against the likes of Singapore’s DBS and OCBC, not to mention the HSBCs of the world?
Despite the many doubting Thomases, Nazir acted quickly to achieve his big dream. In fact, he had already started making his move before his public proclamation.
CIMB acquired Indonesia’s PT Bank Niaga in 2002, followed by the purchase in January 2005 of Singapore’s largest and best-known stockbroker GK Goh Holdings Ltd for RM550 million. The purchase of a prized asset in the region’s financial hub sent a clear message of Nazir’s intent and sped up the momentum.
In June the same year, Nazir announced the merger of CIMB (Commerce International Merchant Bankers) and Bumiputra-Commerce Bank (BCB) to form CIMB Group.
The merger evoked conflicting emotions.
BCB was the result of a merger between Bank of Commerce and Bank Bumiputra Bhd, a commercial bank that was set up by the government to help bumiputera businessmen. It had to be bailed out three times since its inception in the early 1970s.
Various Malay interest groups and politicians were upset, not only because the name Bank Bumiputra would cease to exist, but also because they feared the days of getting easy loans and not having to pay them back were over.
At the same time, admirers of CIMB, which was regarded a savvy investment bank, shuddered at the thought of cross breeding it with Bank Bumiputra.
As Nazir says in this interview with The Edge, one fund manager called him up and cried because she was so upset.
Those were certainly trying days, but Nazir followed up in October by launching a hostile takeover bid for Southern Bank Bhd (SBB), a niche bank with close links to Chinese businesses and a good retail banking franchise.
The takeover created some political undercurrents but SBB was subsequently integrated into CIMB Bank at end-2006.
Along the way, apart from making more acquisitions in Thailand and China, the group undertook a major rebranding exercise in 2007 to reflect its transformation into a regional universal bank.
When The Edge met Nazir in his office on the 36th floor of CIMB’s spanking new head office in Jalan Raja Laut, Kuala Lumpur, he was brimming with energy and verve, despite what must have been a very hectic five years.
He says he is pleased that CIMB Group Holdings Bhd (the name under which it is listed on Bursa Malaysia) is ahead of schedule in its transformation.
“In 2009, we decisively fell into a regional position. Analyst reports have begun talking about CIMB as a regional stock. This was partly because Indonesia became very hot and our composition of foreign earnings grew,” says Nazir.
In FY2009 ended Dec 31, CIMB Group made a net profit of RM2.8 billion compared with RM1.95 billion in FY2008.
Earnings contributions from its foreign operations, powered by PT CIMB-Niaga Bank, rose to 29% from 12% in FY2008.
“This indicates that the group is making good progress in its regional growth plans, which include a bigger regional IB [investment bank] market share and transactional banking growth trajectory,” OSK Research says in a report.
More tellingly, Boston Consulting Group (BCG), in a survey of the banking sector’s performance over the last five years in the region, ranked CIMB Group second in the mid-sized category in terms of relative total returns to shareholders, ahead of Singapore’s OCBC and UOB.
BCG also said CIMB had overtaken DBS in the race to become a leading bank in the region.
Value creation
Nazir says it has not been all smooth sailing, more so when the global economy was plunged into a deep recession in 2009, in the wake of the US banking crisis.
Nonetheless, the transformation at CIMB Group has begun to show results, not just in terms of expanding its regional footprint but also in terms of value created for shareholders.
“If you had invested in the CIMB IPO when it was listed in 2003, shareholders’ returns averaged 113% per annum [as at March 10, 2010]. If you had invested in Bumiputra-Commerce Holdings Bhd (BCHB), you would have made 49% per annum,” Nazir points out.
He notes that from June 2005 until now, CIMB’s market capitalisation has increased from US$3.3 billion to over US$14 billion, the fastest among all major banks in the region.
“This has made us Southeast Asia’s fifth largest bank. I don’t know which other company can report such value enhancement from transformation but there can’t be many,” he says.
Over the last five years, the banking group also saw an improvement in its asset quality and capital management.
Its non-performing loan (NPL) ratio has fallen to below 2%, and in terms of capitalisation it is in a comfortable position with its Tier-1 capital adequacy ratio at 14.8% and Tier-2 CAR at 15.1%.
In fact, there was talk that CIMB was considering a capital payout when the group announced its FY2009 earnings in February, but that did not materialise and shareholders were disappointed.
According to Nazir, while CIMB’s capital adequacy is high by any measure, it would be irresponsible to consider a payout at this stage. “We don’t want to have any concerns about our capital position,” he says.
CIMB announced a dividend payment of 18.5 sen per share and a one-for-one bonus issue.
Going forward, Nazir believes there is still a lot of upside potential.
“If you look at the return on equity of 15% [in 2009], it was with a negligible contribution from Thailand, start-up losses in Singapore, and still early days in Indonesia as Niaga and Lippo only merged last year,” he elaborates.
He is cognisant of the fact that CIMB in Malaysia has a lot more ground to cover, but it is also because of this that he sees more upside.
The bank is still weak in consumer banking. Nazir acknowledges that CIMB’s CASA (current account, savings account) and retail customer base are not commensurate with its platform. “We lost many years under various legacy banks,” he says.
Some analysts note that CIMB’s loan growth (11% in FY2009) is outpacing deposit growth, which means that the bank will have to turn to the interbank market to meet this shortfall. This possibly means higher cost of funding, and hence a squeeze on margins.
In terms of consumer banking, some analysts are of the view that CIMB has yet to entrench its position, as reflected by the segment’s fluctuating contribution to profits in the last few years. According to the latest report by Macquarie Equities Research, a look at the contribution of consumer banking to the group’s earnings shows that it is still dependent on corporate and investment banking as well as treasury operations.
But this is where Nazir sees more upside potential for the group. “We have clearly beaten the odds placed on us. We have to continue doing so. The momentum is strong, and we have already embarked on the various multi-year projects that are key to our future,” he says.
An excerpt of the interview with Nazir follows on the next page.
This article appeared in Corporate page, The Edge Malaysia, Issue 798, Mar 22-28, 2010.