This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.
THE DNA of CIMB Group Holdings Bhd is changing. Just in the past year alone, Malaysia’s second largest banking group undertook several cost-cutting initiatives that included major mutual separation schemes (MSS) and restructuring exercises in a few markets, costing it nearly RM720 million. It also saw the changing of the guard and reorganised its businesses as well as structure.
Today, more than 50% of the top guard at CIMB Group is new. Additionally, investment banking, its jewel in the crown, is no longer as big a revenue driver as before. CIMB Group’s consumer banking business is gaining ground. It contributed the most to its profit before tax for the financial year ended Dec 31, 2015. It is obvious that the group, which had started off as an investment bank, is no longer as reliant on its investment banking business as before.
The increase in contribution from the consumer segment, industry observers say, is also partly due to the headwinds the investment banking environment is facing. So, as the fee income drops owing to fewer deals, the contribution from the other segments such as consumer banking will show an increase.
“The first year has been very challenging,” admits group CEO Tengku Datuk Seri Zafrul Aziz.
When he first took over the post from Datuk Seri Nazir Razak, Zafrul says, the market was already showing signs that it would slow down.
“What we didn’t expect was the volatility and the extent of the challenges that we would face,” he says.
He took over as acting CEO in September 2014 and assumed the role officially in February 2015.
In an exclusive interview with The Edge, a candid Zafrul shares that the journey at the driving seat of the group thus far has been an eye-opening experience.
“You can’t plan for everything. But what is important is the ability to adapt and execute some of the things that we needed to do. In a way, you have seen our results. It is still very much a journey. T18 (Target 2018) is towards 2018 but what we wanted to do is to make sure that we hit the milestones for 2015,” he says.
He adds that CIMB Group saw a positive Jaws ratio in FY2015. A positive Jaws ratio shows an entity’s income growth rate exceeding its expenses growth rate, measured as a percentage.
“This is the first time we have managed to get a positive Jaws. The last four years were all negative, where cost grew more than income. To change that ratio to a positive 6.9% is a massive step,” he says.
“People were very sceptical about our cost management programme because CIMB Group is not normally known to cut cost. When CIMB Group said it would cut cost, nobody believed it ... but we’ve shown that [we can]. And when people said ... no way the management would do certain things ... we’ve shown that our guys can adapt to changes.”
On top of controlling cost last year, Zafrul says, the CIMB team managed to ensure that the engine was still strong. “So, we recorded our highest-ever revenue for the group last year, despite the challenges.”
“People were also worried about our capital, saying that we were a company that was very good at consuming capital but not generating enough returns on capital. We’ve showed that in the last quarter, our CET-1 (Common Equity Tier-1), from 9.3% in September 2015, went all the way up to 10.3%, because we changed the way we approached capital,” he says.
For FY2015, CIMB Group saw its top line growing 9% year on year to RM15.4 billion. Its net profit dropped 8% to RM2.85 billion due to higher provisioning expenses. Its return on equity (ROE) stood at 7.3%, down from 9.2% in FY2014. Cost to income ratio dropped to 55.6% from 59.1% for the same period while total capital ratio improved to 15.8% from 14.7% in the same period.
CIMB Group made RM2.2 billion worth of provisions for FY2015 — of which 71.7% came from CIMB Niaga, 22.7% from CIMB Thai and 5.6% from CIMB Bank.
Zafrul shares that the higher-than-expected provisions were a disappointment. “We budgeted for it in Indonesia, but we didn’t budget for it this large. So, we hope that we learnt from that and this year, we need to make sure we put in place all the right systems and learn from the mistakes,” he says (see accompanying story).
Despite concerns that the asset quality of local loans may deteriorate, he says, the group has yet to see an uptick in provisions here. “We are pleasantly surprised. For Malaysia, it depends on the economy. But whether this [asset quality remaining intact] is sustainable or not is another question,” he says, adding that factors such as the macroeconomic environment and the operating landscape are very volatile.
Malaysia accounted for 79% of CIMB Group’s profit before tax in FY2015 while Indonesia and Singapore both contributed 8% each, and Thailand, 3%.
Cost optimisation, divesting non-core
Acknowledging that income growth is still one of the top concerns of the industry today, Zafrul says the group will continue to focus on optimising cost as well as divesting its non-core assets.
“I think now is a test for all of us to see how we address these concerns. We were lucky because we started the T18 initiative at the right time,” he notes, adding that when markets are tough, one has to make tough decisions.
“We are looking at selling off non-core — this will free up some capital. Last year also was a tough year because the whole restructuring cost was about close to RM718 million, so that eats into capital. And provisions also eat into capital. So, we need to make sure that it’s a one-off. This year, the restructuring cost won’t be that high.”
Aside from its major core banking businesses in Southeast Asia, CIMB Group also has a 20% stake in Bank of Yingkou in China that is parked under its private equity business. Banking analysts say given that it is only a 20% stake, the Chinese bank is a non-core asset. “They also have a stake in the Touch ’n Go business, and there is also a view that the private equity business could be a potential non-core asset,” says an analyst who covers the stock.
The Edge wrote in February, citing sources, that the group was in talks with foreign financial institutions to form partnerships for its securities business. The working relationship options it is exploring include selling part of the group’s stake in the securities business. It was reported by Singapore media recently that CIMB Group is in talks to sell at least part of its brokerage in Singapore to a Chinese broking house.
Just a fortnight ago, CIMB Group announced that it had signed a conditional pact to sell a 51% stake in PT CIMB Sun Life to its joint-venture partner Sun Life Assurance Company for US$42 million.
The group is on a mission to get its groove back.
In February last year, CIMB Group outlined its new T18 plans with a target of achieving an ROE of 15%, CET-1 ratio of over 11%, a cost income ratio of below 50%, and a 60% consumer banking income contribution by end-2018.
Industry observers point out that given the tougher operating landscape in the banking industry, banking groups that are stronger in the investment banking segment, such as CIMB Group, were harder hit as the pipeline for deals dried up and fee-based income fell.
This, banking analysts say, could be one of the reasons why CIMB Group is looking to strengthen its consumer banking division contribution.
“Consumer banking — the bread and butter business of traditional banks — provides a stable income flow. It may not be as sexy as investment banking, but it is a steady and predictable business. The investment banking heydays are over,” says one analyst.
At the start of this year, CIMB Group retrenched 30 staff at its Hong Kong investment banking and equities operations.
In 2015, CIMB Group cut over 150 jobs, mainly in the investment banking space outside Malaysia and Indonesia. The majority of them were from the Royal Bank of Scotland, which CIMB Group bought in 2012. The RM800 million deal (consideration RM431.8 million with an additional RM417.6 million injected as capital) catapulted CIMB Group into an Asia-Pacific investment banking player. It had led some to question whether it may have overstretched itself as it led to a significant cost increase at CIMB Group.
Last year, CIMB Group also undertook a MSS for its Malaysian and Indonesian businesses in which a total of 3,614 applications (1,908 from Malaysia and 1,706 from Indonesia) were approved.
The group also saw a changing of the guard. Today, more than 50% of its heads are new, including Tigor M Siahaan as president director of CIMB Niaga and Rafe Haneef as CEO of CIMB Islamic.
A number of CIMB Group’s heads, who were viewed as lieutenants of Nazir, have left the operations side, giving Zafrul space to shape his own team. They include former CEO of corporate banking, treasury and markets Datuk Lee Kok Kwan and former group CFO and CEO of group strategy and strategic investments Kenny Kim. Lee and Kim are now in advisory roles. Lee is also a board member.
Zafrul shares that forming the team has been a high point for him. “It’s not easy to take over from someone who’s done so much for the company, right? ... And leaving it to me to take it to the next level. So, when I asked for advice, everyone kept telling me the most important ingredient is to make sure you have the right people,” he says.
He believes he has managed to form a good team with the right mix of people — both old and new to CIMB Group — who are strong in the industry.
Stamping his mark
When news broke over a year ago that Nazir would be passing the CEO’s baton to Zafrul, some people were not convinced that the latter could fill the former’s big shoes.
Fast forward to a year after, and the scepticism seems to be fading away.
“Give him credit for the cost cutting. It takes guts for someone to not be worried about the politics and go ahead ... It was the first major staff rationalisation exercise in the banking industry and it had to be done. Revenue was suffering ... Banks have no choice,” says a director at a foreign financial services company.
“Nazir has loosened his grip on CIMB. They do consult him but from what I understand, he does not control the reins as much anymore,” he adds.
A team head at CIMB Group, who had worked with Nazir and now reports to Zafrul, acknowledges that CIMB Group has morphed “quite a bit” in recent times.
“Under Nazir, CIMB was a one-man, one-personality banking group. That has changed under Zafrul. Some of the changes implemented recently, apart from the reorganising, also included regionalising consumer banking. We are also a balance sheet business now — funding and lending — and not just mainly advising,” he says.
“He may not be as suave an operator as Nazir, but he has so far done things that made sense for the group when the winds drastically changed so quickly. The hard decisions that he had made could have been disastrous but so far, I think we can all see that they are starting to pay off,” he adds.
Asked what is it like to have worked for the both of them, he says, “Both have their own strengths, and also their own peculiarities”.
“Please, do not mention my name,” he laughs.
A managing director of a business unit at rival banking group Maybank says Zafrul gave room for existing talent to grow when he was CEO of the investment bank there.
“He played everyone to their respective strengths, which is a skill in its own right. I think it’s too early to tell whether or not he has made a positive impact at CIMB Group but to be fair to him, he did join the group at almost its lowest point… it was not exactly the best of times,” says the senior banker, who had worked with Zafrul in Maybank.
Investors seem to be taking notice of the stock again. Falling to below RM4 earlier this year, touching a six-year low of RM3.85 on Jan 21, the stock has risen to close at RM4.77 last Friday.
CIMB Group — notable events
1987 - Bank of Commerce lists on Bursa Malaysia.
1991 - Bank of Commerce merges with United Asian Bank. In a major restructuring, the merged banks become Bank of Commerce (Malaysia) Bhd under holding company Commerce-Asset Holding Bhd (CAHB). CIMB becomes a separate CAHB subsidiary.
1999 - Bank of Commerce (Malaysia) Berhad merges with Bank Bumiputra Malaysia Bhd to form Bumiputra-Commerce Bank Bhd.
2002 - CAHB takes a majority stake in Indonesia’s PT Bank Niaga Tbk. It completes the acquisition of a 51% stake in PT Bank Niaga from the Indonesian government via the Indonesian Bank Restructuring Agency. CAHB paid IDR1,057.4 billion (RM439.1 million) for the stake.
2003 - CIMB lists on Bursa Malaysia.
2005 - CIMB acquires GK Goh Securities in Singapore for S$239.14 million (RM554.8 million), translating into a valuation of 1.3 times price to book.
In a major corporate restructure to create a universal bank, CIMB acquires sister company Bumiputra-Commerce Bank from holding company CAHB. CAHB is renamed Bumiputra-Commerce Holdings Bhd.
2006 - CIMB acquires Southern Bank for RM6.7 billion or 2.2 times price to book.
2008 - Bank Niaga merges with Bank Lippo to form CIMB Niaga. Nazir tells reporters that to merge the operations, the bank would spend IDR1.11 trillion.
CIMB acquires a 42.13% stake in BankThai Public Company Ltd for a cash consideration of THB5.905 billion (RM577.4 million). The following year, CIMB acquires more shares of BankThai and renames it CIMB Thai.
2009 - CIMB launches retail banking operations in Singapore.
CIMB cquires a 19.99% stake in the Bank of Yingkou in China for RMB348.8 million cash.
Holding company BCHB is renamed CIMB Group Holdings Bhd.
2010 - CIMB launches banking operations in Cambodia, bringing its retail banking presence to five Asean nations – Malaysia, Indonesia, Singapore, Thailand and Cambodia.
2012 - CIMB starts the acquisition of most of the Asia-Pacific cash equities and associated investment banking businesses of the Royal Bank of Scotland, and expands operations in Sydney, Melbourne, Hong Kong, London and New York. It was a £173.9 million (RM849.4 million) deal. [Consideration was £75 million (RM431.8 million) with an additional RM417.6 million injected as capital.]
CIMB acquires 70% of SICCO Securities, a Thai stockbroking company, for THB767.9 million (RM78.4 million) with a price-to-book ratio of 1.17 times.
2013 - CIMB completes its Asia-Pacific investment banking platform with new operations in Taiwan, India and South Korea.
Sells CIMB Aviva for RM1.11 billion
2015 - CIMB divests its 49% stake in CIMB Insurance Brokers to HBG Asia Holdings.
Undertakes a mutual separation scheme for its Malaysian and Indonesian businesses where a total of 3,614 applications (1,908 from Malaysia and 1,706 from Indonesia) were approved.
Closes Australian business.
Cuts over 150 jobs mainly in the investment banking space outside Malaysia and Indonesia.
Obtains in-principal approval to operate in Vietnam.
Regionalises consumer banking.
Forms wholesale banking division comprising investment banking, private banking, corporate banking, treasury and markets, head transaction banking, equities as well as analytics and strategy businesses.
2016 - CIMB Group announces plans to divest its 51% stake in PT CIMB Sun Life.
Retrenches 30 staff at its Hong Kong investment banking and equities operations.
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