Thursday 28 Mar 2024
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CIMB Group Holdings Bhd’s Indonesian operations, once seen as the most promising of its overseas ventures, disappointed last year for a host of reasons, dragging down the group’s overall financial performance.

A key question playing on investors’ mind as they decide whether to buy, sell, hold or ignore CIMB’s stock is: Will things improve this year or is the group headed for a long and bumpy ride in Indonesia?

“It has been CIMB’s Achilles heel in recent times,” observes a banking analyst, of the Indonesian venture.

Just five years ago, CIMB’s 97.94%-owned Indonesian lender PT Bank CIMB Niaga Tbk (CIMB Niaga) was seen as having so much potential that Datuk Seri Nazir Razak — the then CIMB group CEO — predicted that earnings from there would overtake Malaysia’s by 2015.

However, it may be a while yet before that happens.

Last year, Indonesia accounted for just 19% of CIMB’s earnings — in previous years, at best it was about 30% — with Malaysia still accounting for the bulk of group earnings.

CIMB Niaga’s net profit fell last year for the first time in six years, by 45.3% to IDR2.34 trillion, primarily due to a 188% surge in provisions for bad loans and low non-interest income. The bad loans were mainly coal and coal-related.

This dismal performance was one of two key reasons — the other being a sharp drop in CIMB’s investment banking business — that led to CIMB seeing a 31.6% decline in net profit to RM3.1 billion last year.

But CIMB Niaga, Indonesia’s fifth largest lender by assets, was not alone in turning in a lower net profit. It was a tough year for all banks amid a slowdown in economic growth — at 5%, it was the slowest in five years — and liquidity drain following capital outflows on the back of global financial volatility.

Some analysts, however, say CIMB Niaga was “not a victim of circumstance only” and suggest that it could have fared better if its credit controls in the past had been tighter.

“The question that needs to be asked is, how did all these bad loans to coal and coal-related companies arise in the first place? Yes, in general, coal companies were plagued by weak commodity prices but the quality of the coal companies that the bank lent to should also be questioned. The better quality ones went to the big state-owned banks for loans,” one of the analysts tells The Edge.

Coal and coal-related loans made up 4.8% of CIMB Niaga’s total loan book, of which 34% (or about RM800 million) were non-performing.

State-owned PT Bank Mandiri Tbk, the largest lender in Indonesia, managed to grow net profit by 9.2% to IDR19.9 trillion last year. However, the net profit of mid-sized lenders, like PT Bank Permata Tbk, PT Bank Danamon Tbk and PT Bank Internasional Indonesia Tbk (BII), fell by between 8% and 55%.

BII, the eighth largest lender, owned by Malayan Banking Bhd (Maybank), was also hit by higher provisions for bad loans and saw net profit fall 54.8% to IDR698.52 billion last year. But BII’s earnings contribution to Maybank has always been small, at about 5%. Thus, its impact on the parent company’s earnings is not as significant as that of CIMB Niaga on CIMB.

CIMB Niaga, though, may see winds of change as it will soon have new leadership. Just last Thursday, it was announced that Tigor M Siahaan, currently the chief country officer of Citi Indonesia, will take over as president director of CIMB Niaga once all the approvals have been obtained. He will succeed Arwin Rasyid who has expressed his intention to retire, CIMB said.

Tigor will have his work cut out for him as Indonesian banks are expected to continue to face earnings pressure and tight liquidity amid lower margins, slower loan growth and further provisioning for bad loans this year, analysts say.

“Given the challenging macro outlook for Indonesia, such as slower economic growth, rising inflation along with a wide current account deficit, we believe the tight monetary policy is likely to stay ... hence, the 2015 outlook for Indonesian banks is dim,” Kenanga Research says in a February report.

CIMB’s new group chief executive Tengku Datuk Zafrul Aziz says the group will likely continue to have to make provisions for bad loans in Indonesia in the first quarter of FY2015 but that these will not be as sizeable as the ones made in the previous quarter.

In 4QFY2014, CIMB Niaga’s provisions stood at IDR1.96 trillion, a 108% year-on-year increase. Its gross non-performing loan (NPL) ratio deteriorated to 3.9% versus 2.23% a year earlier.

Zafrul is optimistic that CIMB Niaga will see an improvement in the second half of FY2015.

“In Indonesia, we feel, the second half will be better. For us, fortunately or fortunately, depending on the time, Indonesia is such a big exposure (relative) to all our peers’. Last time, people would invest in CIMB as a proxy for Indonesia. So, we had that leverage.

“If Indonesia turns out well, then we will outperform the rest. So, we need to do that and, hopefully, with the new leadership at the bank and in Indonesia, some things will improve. So, we need to see. You must remember that we’re starting from a lower base in Indonesia ... that’s why we’re a bit optimistic that the second half will be better,” he says in an interview with The Edge.

Zafrul goes on to say that if the provisions were stripped out, CIMB Niaga actually performed well. “The core banking business is actually doing very well, and it’s across all segments. If you look at our loan growth, deposit growth versus all our peers’, we’re there,” he remarks.

CIMB Niaga’s loan growth was 12.4% last year, better than the industry’s 11.2%, while its deposits grew 6.7% compared with the industry’s 10.7%. Net interest margin was stable at 5.36%, thanks to the central bank’s ruling to cap interest rates on deposits last October. Zafrul guides that loan growth this year will be in the “low teens” while NIM will be softer.

“I think CIMB Niaga’s recovery this year will be modest — don’t expect a sharp recovery. Operationally, it’s going to be pretty tough because loan growth will be relatively moderate, margins are expected to come down and the liquidity situation is still rather tight. Any recovery will be driven predominantly by lower credit cost,” an analysts opines.

Bharat Joshi, head of investments at PT Aberdeen Asset Management, however, reckons that the Indonesian banking system will improve this year.

“This is because 2014 was an election year and business activities slowed down in the final two quarters as corporates waited on the sidelines for the political noises to subside. Now that things are clearer in 2015, SMEs and corporations will start drawing down their loans for working capital and capital expenditure. The banking industry looks a lot more robust than in 2014,” he tells The Edge, adding that he expects loan growth for the year to be in the high single digits to low teens.

“CIMB Niaga will need to start tightening up in terms of the recent rise in its NPLs. To grow in a market such as Indonesia, one has to be very selective and see what is the group-wide strategy — is it to grow new loans or tighten up the existing loan book for fear of future potential loan losses? I think CIMB Niaga will need to weed out the NPLs and restructure them as soon as possible, if it is going to restart the lending engine again. What will drive earnings for CIMB Niaga this year is largely cost savings as the top line softens,” remarks the Jakarta-based investment head.

CIMB will have to convince investors about its Indonesian plan as most analysts currently have a “neutral” call on the stock.

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This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

 

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