This article first appeared in The Edge Malaysia Weekly on November 6, 2023 - November 12, 2023

IT has been a long journey of change and transformation for PT Bank CIMB Niaga Tbk, the 92.5%-owned subsidiary of Malaysia’s CIMB Group Holdings Bhd.

Weighed down by asset quality issues previously, particularly in its corporate loan book, the sixth largest bank by assets in Indonesia has made commendable progress and is in a much stronger position today after embarking on a five-pillar strategy in 2017 to strengthen its foundations. It is currently the fourth most profitable bank in Indonesia in terms of return on equity (ROE), with ROE at 15.4% as at end-September.

Its president director Lani Darmawan says it was a very different situation back in 2016, but with the right strategy, people management and proper execution of the plan, things have changed for the better.

Darmawan, formerly the CEO of the consumer business, took the bank’s helm in December 2021. She has been with CIMB Niaga since 2016, but has over three decades of banking and finance experience.

“Starting 2017, we shifted our focus towards a higher risk-adjusted return on capital (RAROC) kind of business, which is actually the consumer and small-to-medium enterprise (SME) business. 

Previously, we used to be a bank that focused mainly on the corporate [business],” she tells The Edge in a virtual interview, her first with Malaysian media.

Hence, the first strategic priority in its five-pillar plan involved growing the consumer and SME customer segments at a much faster pace while de-risking the corporate segment.

The second pillar was to grow CASA (current account savings account) deposits, which are a relatively cheaper source of funds for banks. According to Darmawan, early investments into digitalisation in 2017 bore fruit for CIMB Niaga as it managed to draw CASA  deposits even during the pandemic years via its retail apps.

The third pillar involved cost-management discipline, with the bank aiming to push down its cost-to-income ratio (CIR) to below 45% through various initiatives, including digitalising its internal processes. The fourth was a focus on capital preservation and risk culture, which has helped improve the bank’s capital and non-performing loan (NPL) ratio over time. The fifth was leveraging information technology to increase the bank’s revenue in the future.

The strategy has paid off. As of the first nine months of its financial year ending Dec 31, 2023 (9MFY2023), CIMB Niaga has managed to increase the financing contribution of its consumer/SME segments to 45.8% compared with 35.9% in FY2018.

Over the same period, its CASA  ratio has improved to 66.7% from 52.6%, while its CIR has come down to 44.2% from 50.2%. CIMB Niaga’s capital adequacy ratio has increased to 23.8% from 19.7% and, most notably, its gross NPL ratio has improved to 2.4% from 3.1%, in line with the industry’s 2.5%. The NPL ratio used to be as high as 3.89% in 2016.

Currently, 97% of the bank’s customer transactions are through digital means compared with 93.6% in 2018. “That creates a lot of efficiency. Cost of transaction is actually coming down,” Darmawan remarks.

The bank, which used to have almost 600 branches in 2016, has reduced the number to 411 currently (including shariah branches and 36 digital lounges). It plans to maintain the number going forward. “What we will do is more relocation, or closing a branch and opening a new one,” she says.

Sharing the lessons learnt from the bank’s painful past, Darmawan says: “We’ve learnt that building the right portfolio mix, and then to have a very diligent implementation of operational discipline and risk management, is very important. We’ve come a long way on that. We’re making good progress, and we’re happy with it.”

CIMB Niaga’s 9MFY2023 net profit rose by a solid 27.2% year on year to IDR4.95 trillion (RM1.49 billion), which came in within analysts’ expectations. Loans grew 5.2% y-o-y to IDR205.6 trillion, with the highest growth coming from SME (8.1%), followed by corporate banking (6%) and consumer banking (5.9%).

But it will be a tough road ahead, with the bank — and industry — facing a key challenge in the form of rising cost of funds, which has compressed net interest margins (NIMs). This comes after Indonesia’s central bank raised the benchmark interest rate seven times since 2022 to tame inflation, for a total of 250 basis points (bps), to 6% currently. The most recent hike, by 25bps on Oct 19, came as a surprise to many and was seen as a move to stabilise the currency.

“Funding costs have notably been catching up and outpacing gains in loan interest yields, no thanks to a less favourable interest rate environment in Indonesia. This may be protracted into the coming quarters, leading [CIMB Niaga] to tone down its FY2023 NIM target of 4.6%4.8% to 4.45%4.55%, which indicates more pressures in 4QFY2023,” says Kenanga Research in an Oct 30 report. The bank’s NIM as at 9MF2023 stood at 4.52%, down by 10bps y-o-y.

Darmawan says the challenge it faces from the rate hikes will likely persist into the first half of next year. “There is a challenge on NIM because of the high cost of funds, and we are not able to [wholly] pass on the cost-of-fund increase to the loans side, especially to non-retail loans. That’s why focusing on CASA makes sense for us,” she says, adding that she expects NIM to eventually improve next year.

The bank is working towards lifting its CASA ratio to a more ideal level of 69% from 66.7% now, which it hopes to reach “within one or two years”, says Darmawan.

The bank’s economists are of the view that the Indonesian central bank will likely raise the interest rate one more time this year before starting to cut rates from the third quarter next year.

Darmawan points out that CIMB Niaga has not seen any deterioration in asset quality since the central bank started hiking rates in August 2022. It has, in fact, improved. “Because of better asset quality, CIMB Niaga’s cost of credit has fallen to a more sustainable level, and we expect that it will be 1.1%1.2% in 2023 [compared with an earlier expectation of 1.6%1.8%], which will continue in that range for the next two to three years,” she says.

The bank continues to have a conservative provision policy and does not expect to do any write-backs until possibly next year. As for the sale of NPLs to external parties, which CIMB Niaga has undertaken from time to time over the years to help improve its asset quality faster, Darmawan says: “Probably next year there will be a [NPL] sale, but it won’t be that much.”

As for CIMB Niaga’s growth plans, apart from continuing to expand CASA, the bank will focus even more strongly on the consumer and SME segments.

“Within consumer [banking], the primary focus is on mortgages and auto loans, both of which are secured loans with very attractive RAROC. We will continue to expand SME by utilising our branch network and increase contribution from SME investment loans (term loans), which offer a better risk profile,” Darmawan says.

The bank will grow the corporate segment more cautiously, choosing to focus on better-quality customers such as top-tier corporates, multinational companies and selected state-owned enterprises. “This year, we have been growing the corporate [segment] quite well, around 6% to 7%, just to make up for the shrinking portfolio in the last couple of years. But I think, moving forward, with the challenges that we have, it is more relevant for us to concentrate on lower-ticket-size [loans] in consumer and SME,” she adds.

Darmawan says she remains confident the bank can hit its ROE target of 14% to 16% this year, aided by its ability to generate more fee income — such as from wealth management and trade — and treasury income.

As at end-September, CIMB Niaga had distributed sustainable financing amounting to IDR52.55 trillion, the equivalent of 25.6% of the bank’s total financing.

Indonesia’s Financial Services Authority (OJK) has this year issued a regulation requiring conventional banks having Islamic banking units with total assets of IDR50 trillion to spin off their Islamic units.

Darmawan says CIMB Niaga has two years, that is, until Sept 2025, to submit the spin-off application for CIMB Niaga Syariah.

Ideally, the bank would like to continue with its dual banking leverage model, which is similar to how CIMB Group operates in Malaysia. “Hence, we are in intense discussions with OJK … as we need to ensure that the Islamic portfolio continues to grow. Because, currently, we are the second-largest Islamic bank in terms of assets, after Bank Syariah Indonesia. We have been growing the business by 30% to 40% on an annual basis,” she says.

Asked how soon the bank expects to have the decision on whether it may be able to continue with the dual banking leverage model, she says: “We can’t really put a target as it depends on the response of the regulators. We have regular discussions with them.”

Separately, Darmawan declined to comment on a Reuters report last week citing unnamed sources that CIMB Group may be among firms vying to buy Indonesia’s PT Bank Commonwealth. The latter is 99% owned by Australia’s largest lender Commonwealth Bank of Australia.

“We do not comment on speculation,” Darmawan tells The Edge, echoing a response from CIMB Group.

Back in 2002, CIMB Group, then known as Commerce Asset Holding Bhd, bought into CIMB Niaga (then known as PT Bank Niaga). The Indonesian lender rebranded itself as CIMB Niaga in 2008, just before its merger with Bank Lippo.

Indonesia is CIMB Group’s biggest overseas market. It derived 26% of its 1HFY2023 pre-tax profit of RM4.72 billion from Indonesia.

CIMB Niaga’s share price has gained 59% this year to close at IDR1,720 on Nov 2, for a market capitalisation of IDR43.23 trillion. 

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