CIMB back on track
Banking group to capitalise on Sompo’s reach within Asean and its strength in corporate banking
IT’S 4.30pm on a weekday during the fasting month of Ramadhan but Tengku Datuk Seri Zafrul Aziz ( pic below) shows no let-up in his deep discussion explaining the progress of the bank’s medium-term strategy dubbed the “T18”.
From the 30th floor of his office in the vicinity of Kuala Lumpur Sentral, the traffic snarl is building up, matching the pace of the conversation.
Suddenly, the conversation comes to a halt. The 43-year-old group chief executive of CIMB Group Holdings Bhd is alerted on a development involving the lender that is out on an online news portal fast making its way to the social media.
Generally, bankers do not have to deal with such things for two reasons. Firstly, banks are hardly fodder for discussion on social media, and secondly, even if they were, such matters are often not big enough for a CEO to take notice of. But CIMB is obviously a different kettle of fish. It is high-profile compared with its peers, given that its chairman is prominent banker Datuk Seri Nazir Razak, who is also the brother of Prime Minister Datuk Seri Najib Tun Razak.
Managing social media news is just one of the many things that Tengku Zafrul has had to contend with since taking over from Nazir who stepped down as chief executive in 2014.
CIMB is a stock loved by investors for its liquidity, but they are also quick to punish it at the slightest hint of bearish sentiment.
Needless to say, the past 18 months have been challenging amid a broader weaker economic environment, one of the reasons why the stock is now one of the cheaper local banking stocks in terms of price-to-book value.
Tengku Zafrul, in his relentless pursuit to increase shareholder value, plans to continue with his strategy of bringing costs down while building on new avenues of growth, which include the commercial and SME banking segment, transaction banking and digital banking.
His efforts appear to have already shown results.
“Last year was the first year – after five years – (that) we grew income more than costs. The market has not been good in the last three years,” he says.
The group’s cost-to-income ratio (CIR) – a measure of how tight a ship the bank runs – stood at 59% in January 2015.
“This year, we will continue to manage costs and our target is to bring our CIR to 53% for 2016,” says Tengku Zafrul.
The country’s second-largest lender by assets, which is 29.7%-owned by Khazanah Nasional Bhd, has another reason to cheer.
According to Tengku Zafrul, it will be able to achieve its common equity Tier-1 (CET1) capital ratio target of 11% in this financial year, two years ahead of its 2018 goal, although some analysts think otherwise.
“There are rumours about us needing to do a capital call, but we can generate our own capital,” he says.
Two exercises, namely, its tie-up with one of Japan’s largest bancassurance insurers Sompo Japan Nipponkoa Holdings Inc and its Sun Life Financial Inc deal, whereby it has agreed to sell its 51% stake in the Indonesian life-insurance venture for RM169mil, will help bring down costs and build up capital.
The bancassurance model, for instance, is thought to be a good way for banks to make money because global insurance companies are willing to pay the banks in order to access the lenders’ branch networks to gain exposure to markets they do not have exposure to.
Even so, Tengku Zafrul admits that the Aseancentric banking group is not totally out of the woods yet.
He has said that he is reviewing certain financial targets, including its 15% return on equity target it had hoped to achieve by end-2018.
“The challenge for us is to make sure that income is growing, because markets are slowing down and we didn’t expect Indonesia to be so bad.
“We have got a bit of catching up to do, but in this environment, that’s not going to be easy. That’s the reason we are refocusing on certain areas.”
One of the reasons why CIMB’s earnings have fallen of late is because of its exposure to the region, specifically Indonesia, one of the biggest casualties of weak commodity prices.
In financial year 2015 (FY15), CIMB chalked up a lower net profit of RM2.85bil compared with a net profit of RM3.11bil in FY14,
The lender’s income was affected mainly by loan loss provisions made on its Indonesian business since the fourth quarter of 2014.
Because of such provisions, Indonesia, which used to contribute up to 40% of CIMB’s total pretax profit, is now making single-digit profit contributions.
“(But) the second half of the year will be much better than the first half,” Tengku Zafrul opines, referring to less provisions on bad debts.
“When we talk to our clients, the tone has changed from last year. They want to invest. Definitely, from the second half and next year onwards, there will be a pick-up but (it is) not the same for Thailand and Malaysia yet.”
According to Tengku Zafrul, if Indonesia really improves next year, “CIMB will outperform the market for sure”, as it is the only bank with the bigger projects in Indonesia.
“But if it doesn’t improve like the last two years, then we will still not do well. Indonesia contributes close to 30% revenue. In its heydays, it was 40%.”
Provisions aside, reorganising its business model will be a focus in 2016, say analysts.
“Net interest margins may still decline because of this,” AllianceDBS tells its clients in a report.
As for CIMB’s Thailand business, growth has been generally flat.
“As part of the T18, we want to re-look the Thai market in the consumer business especially.
“We have never made money in consumer banking in Thailand. But in the first quarter this year, we turned around the business.”
The bank did this by refocusing on the affluent market.
“Previously, it was to have as many branches as possible and go into areas where there was not enough traction. But we can’t compete with the big banks so we changed strategy by reducing the number of branches and focusing on the city towards what we call here preferred banking/ wealth management. We have done well and finally turned around in the consumer business.
“There are some positives there but overall it is relatively flat.”
CIMB’s Thailand business remains small. Together with its Singapore business, they contribute 5% to 6% profit-wise. Still, Singapore was bigger tha an Indonesia in terms of profit last year.
In line with its aim to focus on it ts three key businesses and manage costs, CIMB iss also looking to divest its non-core assets and some e underperforming ones.
“Even as we speak, our rep is in n China to talk to the management of the Bank of Yingkou on our intention to sell our 20% stake. MostM likely, it will be to a Chinese party and someon ne they (the controlling shareholders) can work with.”w
CIMB bought into the China ban nk in 2009, paying 348.8 million yuan or RM156.2 2mil cash, which translated into a price-to-book rati io of 158 times.
Tengku Zafrul says that with thee exception of its investment in local supermarket ch hain Jaya Grocer, its other private equity business ses will also be wound down to refocus on unit trusts and fund management.
Last year, the bank wound do own its micro-finance business in Indonesia. It is se ervicing existing loans there but not booking new o ones.
As for its securities business, Tenngku Zafrul says going by the trend in the region whhich has seen big banks paring down their stakess in brokerages, there is hardly a need to have conttrolling stakes. CIMB owns 100% of its securitiees business. “We do not think we need to (holld 100%), but we do not want to exit the business tootally and at the same time, we want a partner that can give us a bigger and wider reach.“
In this regard, he feels a partnner outside Asia will be suitable.
“Someone that can give us a northn Asia platform, Europe or even a global plattform and in return, we give them our strengthh which is the Asean platform, we then jointly control.”
He emphasises that a scenarioo in which CIMB exits the securitiees business completely is not on thee table.
“Investment banking is in CIMB’s DNA and we think there is value in Asean equities.” Under Malaysian rules, up to 70% of securities firms can be sold to foreigners
Contrary to market perception on often been seen as non-core, Tengku Z that the group will not divest its stake in Go Sdn Bhd.
It owns 52% of the electronic payme provider, with MTD Capital Bhd a Expressways Bhd owning the remaini and 20%, respectively.
“This entity is strategic and we can lev as there is a retail angle here beyond toll and public transportation.”
If everything goes according to plan, T could emerge as its “fintech” platform in space as the market graduates to cas ments.
“It is the future and we need to invest m get the right business plan and find the ner.”
CIMB closed at RM4.31 yesterday, v banking group at RM37.6bil.
At the current price, the stock is trad times price-to-book. In contrast, the coun est bank, Malayan Banking Bhd, is trad times.