CIMB big enough for now
Banking group rules out M&A in Malaysia but is open to deals in selected markets
AMID questions about which local banks could be next to explore merger and acquisition (M&A) deals in Malaysia, following the collapse of several potential deals in recent years, at least one has ruled itself out of the game.
CIMB Group Holdings Bhd, which had gone through two failed M&A deals over the last seven years, has now lost interest in finding any potential target for a corporate marriage in the country.
And for good reasons.
As the second-largest banking group by assets in the country, CIMB already has the scale that enables it to compete effectively in the current demanding business environment.
In addition, the group’s presence in several key regional markets is gradually gaining ground and helping to drive growth.
So, there is no need for CIMB to explore M&A opportunities as a way to expand in Malaysia at this juncture, says its group chief executive officer Tengku Datuk Seri Zafrul Aziz.
“We are happy with the scale that we have today in Malaysia. We are not interested in pursuing any acquisition deal in the country,” Tengku Zafrul tells StarBizWeek.
What’s more, at CIMB’s present size and scale, it may be difficult to find a potential M&A deal in the country that could deliver on revenue and cost synergies to justify or execute the deal.
CIMB and its bigger rival Malayan Banking Bhd (Maybank) were entangled in a fight about six years ago for RHB Bank Bhd, which was then known as RHB Capital Bhd. The takeover deal fell through reportedly because substantial shareholder Abu Dhabi Commercial Bank PJSC was seeking a very high exit price for its block of shares in RHB.
For CIMB, a merger with RHB would have propelled it to the position as the second-biggest financial institution in South-East Asia after Singapore’s DBS Bank, while a takeover of RHB by Maybank would have created a financial institution with a market value exceeding that of DBS.
Subsequently, in 2015, CIMB became involved in a proposed three-way mega-merger involving RHB and Malaysia Building Society Bhd. This deal was called off by CIMB after declining economic conditions cast doubts over the synergies that could be reaped from the exercise. Furthermore, Aabar Investments PJS, which holds 17.75% in RHB after buying the stake from its sister company Abu Dhabi Commercial Bank, was also seen as wanting a high exit price.
Had the deal gone through, the three-way merger would have created the largest banking group in Malaysia, overtaking Maybank.
Consolidation of banks in Malaysia is something that is encouraged by the Government, as it will help create regional banking champions. This is in line with the Government’s objective to increase investment in the country and move the country up the value chain.
Tengku Zafrul notes that while CIMB is no longer interested in pursuing any M&A deal in Malaysia, it remains open to deals in selected regional markets, where the group has “subscale” size.
“Besides Malaysia, Indonesia and Singapore are the markets where we are quite satisfied with the scale that we have,” he says.
“But for other countries in the region such as Thailand, Cambodia, Vietnam and the Philippines, we are open to look at acquisitions. We are not actively pursuing ... so, any acquisition that comes along will be opportunistic – if there is a good deal, we will definitely not say ‘no’,” he adds.
Meanwhile, CIMB expects its collaboration with China Galaxy International Financial Holdings Ltd to open doors for more business opportunities with Chinese companies as more investments are expected to flow between China and South-East Asia.
Recall, CIMB’s wholly-owned unit CIMB Group Sdn Bhd last month formalised a strategic partnership with China Galaxy to manage CIMB’s stockbroking business outside Malaysia. The RM515mil deal would give China Galaxy, one of the largest Chinese securities firms, a 50% stake in CIMB Securities International Pte Ltd (CSI), which operates institutional and retail brokerage, equities research and associated securities businesses across Indonesia, Singapore, Thailand, Hong Kong, South Korea, India, the United Kingdom and the United States.
Focus on SMEs
Meanwhile, one business segment is gaining the focus of CIMB. And that is the small and medium enterprise (SME) segment, especially for the group’s operations in Malaysia and Indonesia.
“This segment is the next growth opportunity for us,” Tengku Zafrul points out.
“In Malaysia, we may be strong in the retail and wholesale segments, but we feel that our presence in the SME segment is just not big enough ... so this is one segment that we want it to grow faster,” he explains.
The recent launch of CIMB’s Biz123, which is a one-stop platform that offers a complete range of solutions for businesses, is one of its many initiatives aimed at helping the group widen its reach in the local SME market, which is growing in significance.
SME at present contributes about 36% of Malaysia’s gross domestic product (GDP).
By 2020, SMEs’ contribution could well increase to more than 40% of the country’s GDP.
Ahead of the long weekend break, CIMB’s shares rallied, rising 38 sen, or 5.7%, to close at RM7.08 on Wednesday.
Year-to-date, the counter has gained about 57%.
At current level, CIMB’s shares had already run ahead of the median 12-month target price of RM6.83 for the counter based on estimates by 21 out of 26 brokerages. It is also hovering at around 13 times the group’s estimated earnings for 2018, which is relatively in line with the industry’s average.
Positives priced in
The recent run-up of CIMB’s shares is an indication that the market has already priced in a lot of positives about the company’s prospects.
Hence, some analysts note there is limited upside for the counter.
“We see little room for CIMB’s shares to rise further given the fact that the counter has already run up since the start of the year. Investors have already priced in the positives of the shares,” says one broker.
Similarly, MIDF Research in its recent report points out the limited upside for CIMB warrants a “neutral” stance for the company’s shares.
“Despite our optimism on the group’s fundamentals, the share price have appreciated by more than 39% since our upgrade to ‘buy’ in April last year. As such, with limited upside currently, we are maintaining our ‘neutral’ call with an unchanged target price of of RM7.10,” the brokerage explains.
MIDF says it likes CIMB for the group’s achievements in growing its income, especially net interest income, which was underpinned by its ability to improve net interest margin (NIM) and grow its loans book strongly. The brokerage also likes the fact that expansion in CIMB’s CASA (current account savings account) franchise continues to be robust.
Nevertheless, MIDF is still slightly concerned about the asset quality of CIMB’s operations in Indonesia and Thailand, even though the situation in both the markets is seen as gradually improving.
CIMB’s net profit stayed above the RM1bil mark in the second quarter ended June 30, 2017 (Q2’17) on the back of firmer revenue.
It has declared a higher interim dividend of 13 sen, which would translate into a payout ratio of 51.6% for the first half of the year (H1’17).
Its earnings growth of 26.3% to RM1.1bil in Q2’17 from RM872.82mil in the corresponding period last year was driven by loan growth across segments, improvements in NIM and a better-performing capital market.
In addition, the group also reported good topline growth in consumer banking in Malaysia and Thailand, and in regional commercial and corporate banking businesses. During the quarter, CIMB’s earnings per share rose to 12.25 sen from 10.07 sen while its revenue grew 10.8% to RM4.33bil from RM3.90bil in the previous corresponding period.
For H1’17, CIMB’s net profit grew 35.3% y-o-y to RM2.28bil, or 25.56 sen, with an annualised return on equity of 9.9%. Its revenue rose 13.8% y-o-y to RM8.68bil in the period.
During the period in review, the group’s total gross loans (excluding the bad bank) grew 8.2% y-o-y, while total deposits grew 9.6% y-o-y. The group’s loan-to-deposit ratio stood at 92.4% in H1’17 compared with 93.5% in H1’16.
Tengku Zafrul says CIMB remains on track to meet the group’s full-year loan growth target of 6%-7%, driven by its Malaysian operations.
Overall, Tengku Zafrul says CIMB remains cautiously optimistic for the second half of 2017, given the strong GDP growth for Malaysia and Indonesia, and the expected gradual improvement in Singapore and Thailand, all of which signal increased regional activities and improved capital markets. “We will continue to chase growth, but we are mindful of the importance of managing costs and asset quality across all businesses. We will continue to focus on the 5Cs – capital, cost, culture, customer experience and compliance – and we are cautiously optimistic that CIMB is on track to meet its key financial targets for 2017,” he says.