Friday 29 Mar 2024
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AS EXPECTED, CIMB Group Holdings Bhd turned in one of its worst quarterly performances in the fourth quarter ended Dec 31, 2014.

The country’s second largest banking group saw its net profit plunge 81% year on year to RM200.3 million, largely due to higher corporate banking loan impairments in Indonesia and Malaysia. Allowance for impairment losses on loans, advances and financing almost tripled to RM919.2 million from RM308.5 million a year ago.

Revenue dropped marginally by 3% y-o-y to RM3.67 billion while net return on equity (ROE) stood at 0.64%.

From an ROE perspective, it was the worst quarter for CIMB (fundamental: 1.35; valuation: 2.1), its newly confirmed group chief executive Tengku Datuk Zafrul Aziz acknowledged at the results briefing for reporters late last Friday.

For the full year, CIMB’s net profit slumped 31.6% to RM3.1 billion from RM4.54 billion a year earlier. Allowance for impairment losses on loans, advances and financing jumped to RM1.52 billion from RM660.6 million a year ago.

The group’s annualised FY2014 ROE was 9.2% — a stark contrast to the 15.5% achieved a year earlier — while its cost-to-income ratio increased to 59.1% from 58.2% before. CIMB proposed a dividend of five sen per share for the quarter versus 11 sen in the same quarter a year earlier.

Zafrul said the group is targeting for ROE to improve to 11% this year and for its cost-to-income ratio to come down to 55%. Asked whether the heavy provisioning will continue, he said: “There will be some for 1Q2015 but it won’t be as bad as for 4QFY2014.”

Zafrul, who expects asset quality to normalise after the first quarter of this year, described FY2014 as a “difficult” year for the group with profitability impacted by slower revenue and a sharp increase in provisions.

“This was partially exacerbated by the weakened rupiah. Capital markets continued to be challenged by low volumes and volatility, which affected the investment banking and treasury market operations. However, we remain heartened by the positive performances of the Malaysian consumer bank and CIMB Bank Singapore while CIMB Thai is showing operational traction,” he added.

Zafrul also shared at the press briefing that CIMB cut 150 jobs due to the closure of its Australia and North Asian business. This represents a single-digit percentage cut of its investment banking workforce. When asked if there were more job cuts in the pipeline, he said it would depend on the review done based on the group’s new T18 strategic mid-term plan.

Zafrul said wholesale banking would still remain the group’s focus, albeit to a lesser extent, given that margins in the segment have become compressed.

He added that by 2018, CIMB wants the consumer banking segment to contribute 60% to the group’s income. In FY2014, this segment contributed 52.8% to the group’s profit before tax while wholesale banking contributed 34.6%. The remaining 12.7% came from investments.

On Feb 6, CIMB outlined its new T18 plan and key organisational changes with a mid-term target of achieving an ROE of 15%, common equity Tier 1 ratio of over 11%, cost-to-income ratio of below 50% and 60% consumer banking income contribution by end-2018.

With the lower 4QFY2014 earnings, CIMB has seen y-o-y earnings drop for the last seven quarters since the quarter ended June 30, 2013. The expectation is that its financial results will continue to be weak until at least the quarter ending March 31, 2015.

A major contributing factor to CIMB’s disappointing earnings is its exposure to the Indonesian market through PT Bank CIMB Niaga.

In 2014, CIMB Niaga saw its net profit fall 45.3% y-o-y to IDR2.3 trillion on the back of provisions rising sharply by 188% y-o-y to IDR3.5 trillion. Its consolidated gross non-performing loan (NPL) ratio had surged to 3.9% by the end of last year from 2.23% in 2013.

Zafrul believes Indonesia will turn around. “Loan growth there is still strong … in the high teens,” he pointed out.

Banking analysts were not surprised by the results as CIMB’s management had already guided that the group would unveil a weak quarter.

“Earnings were dented by the lacklustre capital market performance and higher provisions. Moving forward, I think they will see cautious growth. One of the key things for them to get back on their feet is how good their cost initiatives are and how well they can execute their plans,” says a local banking analyst.  

Another analyst opines that it was good for the group to conduct a “kitchen-sinking” exercise last year, referring to the sharp provisioning. “Lower the base and keep some buffer for 2015,” he remarks.

Despite CIMB’s bad set of numbers, Bharat Joshi, head of investments at PT Aberdeen Asset Management, says there were pockets of positivity.

“If you look at the consumer business of CIMB, it maintained its momentum quietly. Stripping out the rest of the business, the Malaysian consumer business held up pretty well while the Singapore consumer business did a lot better in 2014. The consolidated results were hampered by the wholesale business, which is the treasury market, corporate banking and investment banking,” he tells The Edge. 

“The only surprising bit has been the steep increase in provisioning. Hopefully, management can get a handle on asset quality going forward. All eyes will be on how they rein in asset quality. The saving grace, going into 2015, is the bank’s strong capital position. It is a lot stronger. This should help the banking group beat off some headwinds and concentrate on the actual work of cost-cutting and restructuring the business.”

As at Dec 31, 2014, CIMB’s CET1 ratio stood at 10.1%, improving from 8% a year ago.

Meanwhile, both Malayan Banking Bhd and RHB Capital Bhd, which also released their results last week, saw earnings climb in FY2014 in contrast to CIMB.

Maybank saw its net profit rise marginally by 3% y-o-y to RM6.72 billion while RHBCap’s full-year net profit jumped 11.5% to RM2.04 billion. Maybank’s ROE for FY2014 was 13.6% while RHBCap’s was 11.5%.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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