This article first appeared in The Edge Malaysia Weekly on October 2, 2023 - October 8, 2023

WHEN Datuk Abdul Rahman Ahmad came on board as CIMB Group Holdings Bhd group CEO in June 2020, it was a point in time when the country’s second largest banking group by assets had been lagging behind the industry on a number of key financial metrics, particularly return on equity (ROE). The pressure was on for him to remedy the situation.

CIMB’s cost-to-income ratio (CIR) was one of the highest in the industry, its Common Equity Tier-1 (CET-1) ratio — a key measure of a bank’s capital strength and resilience — was not on par with peers and there were periodic incidents of elevated credit cost. Notably, ROE, a measure of profitability, had been declining. Its ROE hit a low of 2.1% in 2020, the first year of the pandemic, compared with Malayan Banking Bhd’s 8.1%, Public Bank Bhd’s 10.7% and RHB Bank Bhd’s 7.7%.

Adding to the challenges was the fact that Abdul Rahman, formerly the head honcho at Permodalan Nasional Bhd, did not have a banking background. Hence, it was going to be a steep learning curve for him.

Just over three years on, there has been marked improvement in CIMB’s numbers and financial metrics. Tellingly, the stock is currently one of the top banking picks among analysts.

In an exclusive interview with The Edge, Abdul Rahman  speaks candidly about CIMB’s turnaround journey, the challenges ahead and its ongoing acquisition of KAF Equities Sdn Bhd.

The group is now more than halfway into its Forward23+ strategic plan, which was formulated in 2020,  aimed at creating sustainable shareholder value through meaningful improvement in ROE. Forward23+ culminates in the financial year ending Dec 31, 2024 (FY2024), by which time it expects ROE to come in at 11.5% to 12.5%.

As at FY2022, its ROE stood at 9% (or 10.2% on a business-as-usual basis, which excludes one-offs), and this had improved to 10.6% as at 1HFY2023, putting it closer to reaching the FY2024 target.

CIMB’s CIR has steadily come down to a record low of 46% as at 1HFY2023 from 54.8% in FY2019, while its CET-1 ratio has gone up to 14.2% from 12.9% over the same period. Notably, the group’s credit cost has improved significantly, moderating to 51 basis points in FY2022 from 151bps in FY2020, which helped bump up its earnings (see chart).

Abdul Rahman describes the group’s overall progress as being “very positive” and says it provides “good momentum” to deliver on Forward23+ targets.

“What we are most pleased about is our ROE, which we finally delivered, after so many years, in the double digits. We’re no longer one of the least capitalised banks in Malaysia, with our CET-1 at a strong 14.2% as at 1HFY2023. It’s been a lot of work that we have put in [to get here] and the good news is, I think the market has recognised the improvement,” he says.

He notes that between June 1, 2020, and Aug 30, 2023, CIMB’s share price has improved from RM3.28 apiece to RM5.63. Over that period, its total shareholder returns stood at 71.9%, or 18.1% on an annualised basis, compared with a decline of 2.6% and 0.8% respectively in the stock market benchmark FBM KLCI.

Bloomberg data shows that of 19 analysts that track the stock, 15 have a “buy” call and the rest, a “hold”. The average target price was RM6.33, which suggests further upside from its Sept 29 closing price of RM5.43, which accords CIMB a market value of RM57.9 billion.

“[CIMB’s] asset quality has improved with lower provisions, while diversification of its revenue and portfolio reshaping have contributed to a stronger core ROE,” AmInvestment Bank Research says in a Sept 11 report on the sector, affirming its “buy” call on the bank.

A point to note, though, is that CIMB’s gross impaired loan (GIL) ratio, which has improved to 3.3% presently from 3.6% in FY2020, is still by far the highest among banks.

“In general, you have to accept that our GIL ratio will be slightly higher than our Malaysian peers because of our business in Indonesia, which is a higher-risk but higher-return market. But, notwithstanding that, we do actually want to bring down GIL to be closer [in line with that of] the market,” Abdul Rahman says.

CIMB’s biggest shareholders are Khazanah Nasional Bhd with a 23.59% stake, the Employees Provident Fund with 16.92% and Retirement Fund Inc (KWAP) with 6.16%.

With growing macroeconomic headwinds, the question on investors’ minds now is whether CIMB can keep up its positive momentum. Interest rates around the world could stay higher for even longer, China’s growth momentum is slowing and there continues to be war in Ukraine and trade tension between the US and China.

“We recognise all these [challenges]. The economic and the banking industry landscape has been very volatile and challenging, and we expect that to persist over the next 12 to 18 months,” Abdul Rahman says, noting in particular that the slowdown in China will affect the regional economies in which CIMB operates.

Apart from Malaysia, from which CIMB derived about 60% of its pre-tax profit of RM4.72 billion in 1HFY2023, its biggest markets are Indonesia (26%), Singapore (9%) and Thailand (5%).

Abdul Rahman notes that in Malaysia, CIMB’s biggest challenge is managing the industry’s intense competition for deposits, which has effectively pushed down net interest margins. CIMB’s NIM fell to 2.24% as at end-June from 2.47% a year earlier, but he sees NIM stabilising in the second half of this year amid an easing of the deposit competition. “Outside of Malaysia, the countries that we operate in like Thailand or Indonesia, the challenge is not on the deposit side but more on the asset side, which is passing on the higher interest rates to [borrowers].”

Nevertheless, he is optimistic about the group’s prospects given its diversified Asean portfolio, which should provide a degree of earnings resiliency amid the challenges in Malaysia. 

“I think this is one of the things that CIMB has that is quite unique. We can benefit from the markets that are faster growing, particularly Indonesia and Singapore. If you look at our first-half results, while there are markets which are weaker, the overall result has been positive because of these faster growing markets.

“Now, we expect that some of this will change. Singapore has been very strong, and it will probably decelerate [going forward], but perhaps countries like Malaysia, when the deposit competition moderates, will provide a greater level of growth.

“So, that’s why we are pretty confident, or at least cautiously optimistic, in terms of delivering our Forward23+ ambitions,” he says.

Asked about the businesses that CIMB will be driving the hardest for growth for the remaining duration of the Forward23+ plan, Abdul Rahman says that the bank’s biggest focus is on strengthening its CASA (current account savings account) and deposits franchise amid elevated competition in the industry. CASA deposits are a cheaper source of funds for banks.

“We really believe that banks that win are those that win on the CASA and deposits side, because if you can get that, you’re able to compete better on the loan side,” he remarks.

“Yes, obviously all banks are also chasing CASA, but this is where you need to execute [plans] really well, and we believe that having a digital proposition helps. For instance, we’ve invested significantly in the CIMB OCTO, our new app [introduced last year] for retail customers … and we are now doing the same for the non-retail side with our next-gen BizChannel.”

Its CASA ratio in Malaysia declined to 30.3% at end-June from 34.7% at end-2022.

 Abdul Rahman is particularly optimistic about driving stronger growth in Indonesia. “I’m very bullish about Indonesian consumer [banking], which we’ve been growing at about 8% to 9% a year, roughly in line with the market. I think we can grow faster now that everything is much more stable in Indonesia.”

One of the main reasons CIMB saw an improvement in group ROE was its efforts at reshaping its asset portfolio across various markets. For example, in Indonesia, it eased back on the commercial business and certain corporate business  where asset quality issues would tend to crop up, and instead grew the consumer business strongly. It also sold some non-performing loans there, which helped clean up its loan book more quickly. In Thailand, CIMB exited commercial banking and focused on consumer banking.

In Malaysia, Abdul Rahman says there remain “big opportunities” for CIMB to grow its small-to-medium-enterprise (SME) business. “We are not one of the top three players in this particular [segment], so I think that we can grow in the SME and the mid-sized business space more.”

Meanwhile, he sees the Philippines and Vietnam — which CIMB serves through digital-only propositions — as the group’s “future growth” drivers.

“In the Philippines, we are already either the fastest growing or one of the fastest growing digital banks in Asean. We have 7.1 million customers as at end-June, with deposits of RM1.65 billion and loans of over RM1.2 billion. We have really built a path to sustainability there … and we think this will be one of our growth drivers going forward,” he says.

CIMB also plans to grow non-interest income (NOII) more strongly, particularly through transaction banking and wealth management. Its NOII to total income ratio improved to 30.6% in 1H2023 from “about 24% to 25%” in previous years, and it hopes to maintain that ratio going forward.

“So, these are the few areas that we want to focus on and, of course, we have to continue to be cost disciplined. I know it all sounds relatively basic, but I think those are the pillars that we need to continue on to deliver on the numbers amid an uncertain macro and industry environment,” Abdul Rahman says.

In April, without any fanfare, CIMB’s investment banking arm, CIMB Investment Bank Bhd (CIMB IB), moved to buy a 100% stake in KAF Equities — one of the country’s oldest stockbroking firms — from KAF-Seagroatt & Campbell Bhd (KAFSC).

In its 1QFY2023 financial statements, CIMB IB said it had inked a conditional share purchase agreement (SPA) with KAFSC on April 7 for the proposed acquisition of KAF Equities for a cash consideration of RM147.936 million, subject to potential adjustments at the completion date.

The acquisition, which it expected to have completed by the third quarter, is subject to the approvals of Bank Negara Malaysia and the Securities Commission of Malaysia.

The Edge, citing sources, reported about the deal on April 7. CIMB has stayed relatively mum about the deal thus far.

CIMB already has a stockbroking business through CGS-CIMB Securities, its joint venture (JV) with China Galaxy Securities Co Ltd (CGS), one of China’s largest stockbrokers. 

“We are limited in what we can say, predominantly because we have confidentiality provisions in our shareholders’ agreement with CGS, as well as the SPA that we signed with KAF. The SPA, especially, is still subject to regulatory approvals, and that’s why I can’t say much,” Abdul Rahman says when asked about the deal.

As it stands now, CIMB’s equity interest in CGS-CIMB Securities is about 25%, with CGS holding 75%. Their JV is on two fronts — the regional stockbroking business and the Malaysian one.

Buying KAF Equities will enable CIMB to continue to have a Malaysian stockbroking business once it exits the JV with CGS.

“We had a 50:50 partnership with CGS signed back in 2018, and under those agreements, the parties had a put and call option. So, our partner has exercised its call option to acquire the balance 50%. It has already acquired 25%, but the balance of it is still subject to regulatory approvals,” he says.

Asked why the final 25% stake acquisition  was taking so long, he says: “It’s a relatively straightforward deal, but I think because they (CGS) operate in other countries, they require regulatory approval from all these countries, so, that’s ongoing.”

“We see stockbroking as still an integral part of our operation, particularly on the wholesale banking side. We want to make sure that we can provide fully integrated services for our wholesale clients. So, that’s really what is driving the KAF acquisition. We will, however, continue to collaborate with CGS, particularly outside Malaysia,” he says.

He says he hopes to close the KAF Equities acquisition as soon as possible. “We’ve done all the submissions, now we just have to wait for the regulatory approval.”

Asked if the acquisition hinged on CGS completing its transaction first, he says: “We don’t believe so [as] they are two separate transactions.”

Beyond Forward23+, among CIMB’s biggest challenges will be to make bigger strides in the digital and sustainability space, Abdul Rahman says.

“The challenge for CIMB is, how do we really make digital into a core competitive advantage for us? I think we are in a good position because we have done it in some markets like the Philippines where we have developed a very successful digital bank strategy.

“We have seen how, if you are able to do that, you can acquire market share. In the Philippines, from scratch, we now have over seven million customers. Malaysia, if you think about it, has only about 8.3 million customers. But it’s not easy, because all banks want to do it. And, as a traditional bank, we have legacy infrastructure; so pivoting from that legacy infrastructure to a much more digitised operation will be more challenging.”

As for sustainability, he says there are big opportunities ahead in the business of transition financing and the challenge will be in maintaining its leadership position. Last month, CIMB raised its sustainability financing target for 2024 to RM100 billion, from an earlier target of RM60 billion set in 2022, given that it has already mobilised almost RM70 billion.

It will be interesting to see how CIMB evolves on the digital and sustainability fronts going forward. 

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