Friday 29 Mar 2024
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THE major changes happening at CIMB Group Holdings Bhd, which include a business reorganisation, a management reshuffle and plans to cut costs substantially, underscore efforts to ride out a tougher banking environment.

Industry observers say the restructuring — CIMB’s third major one since 2005 — is necessary to stem the slide in the group’s performance in recent years.

The changes, announced last Friday, are also seen as a stamping of the mark by the group’s new leader, acting CEO Tengku Datuk Zafrul Aziz.

Zafrul, 42 this year, had joined CIMB (fundamental 1.35; valuation: 2.10) in January 2014 from Malayan Banking Bhd. Later in September,  he took on the top post at the group, replacing Datuk Seri Nazir Razak who went on to become the chairman.

Sources say the management reshuffle, which includes the creation of a few new posts, also came about because three key individuals — Datuk Lee Kok Kwan (CEO of corporate banking, treasury and markets), Kenny Kim (group CFO and CEO of group strategy and strategic investments) and Arwin Rashid (country head for Indonesia as well as president director and CEO of Bank CIMB Niaga) — had expressed their desire to eventually leave. All three are no longer in management roles in the new line-up.

Lee and Kim, in particular, are some of Nazir’s trusted lieutenants who have been with the group through thick and thin over the years. Thus, it is no surprise that they have been given advisory roles in the new line-up. Lee, 48, who has been with the group since 1996 and helped set up its risk management department, will go on to become a board member while Arwin, 57, plans to retire in a few months.

Kim, 46, has played a key role in CIMB’s major corporate exercises, including all its mergers, acquisitions and disposals since 2004, as well as the regional integration of all the businesses under the group.

Analysts believe the reshuffle is part of a bigger plan where Zafrul is reorganising the team to adjust to the changing banking landscape. They believe the stalwarts will stay on to ensure a smooth transition.

theedgemarkets.com had reported earlier last Friday that there would be a management reshuffle at CIMB.

The relatively new management team will see to the implementation of the group’s mid-term strategy, known as T18 (short for Target 2018).

Zafrul, in a press release, said as part of T18, a new regional commercial and SME banking division would be created. There will also be a new integrated wholesale banking division (combining investment banking, treasury markets and corporate banking) as well as a regional consumer banking division.

Analysts believe there may be job cuts in the offing. Under T18, CIMB is looking at cutting investment banking operating costs by about 30% this year as part of a plan to reassess its investment banking presence in Asia-Pacific.

It gained that presence after buying most of The Royal Bank of Scotland’s investment banking assets in Asia-Pacific in 2012, a move that raised its costs substantially.

“We will be rightsizing, toughening our regional operating model and streamlining processes. And this is just Phase 1 of a long list of cost management measures the firm is undertaking,” Zafrul said.

T18 came about from a strategic review exercise that the group began in January last year.

Elaborating on the group’s T18 targets, Zafrul said he expects CIMB to achieve, by the end of the financial year 2018, a return on equity (ROE) of more than 15%, CET-1 of more than 11% and a cost-to-income ratio of less than 50%, and consumer banking to contribute about 60% to its income.

CIMB’s ROE has been on a downward trend since FY2012 while its cost-to-income ratio has been trending upwards since FY2011. From 16.4% in FY2011, ROE had dropped to 16% in FY2012 and 15.5% in FY2013.

The group’s annualised 9MFY2014 net ROE stood at 11.6%, its cost-to-income ratio at 57.8% and CET-1 at 9.7%.

Its consumer banking segment accounted for 44.2% of profit before tax for the nine months to Sept 30, 2014, while corporate, treasury and markets contributed 44.8%, investment 10.5% and investment banking 0.5%.

Meanwhile, the cost-to-income ratio has been rising, from 55.68% in FY2010 to 54.69% in FY2011, 56.4% in FY2012 and 57.6% in FY2013.  

“It looks like they are serious about cost but it is a long-term target of three years. CIMB will have to demonstrate to the market that they can execute this. They have set targets before and not met them. For example, their ROE target for 2014 of 13.5% to 14% is likely to be missed. The market will want to see more evidence of a concrete action plan before they are willing to take their word for it,” says a banking analyst.  

“Also from the announcement, it looks like some of the old guard are vacating their positions. The market already assumed this will be happening. All eyes will be on whether this new reorganisation will bring about the results that CIMB says it expects to achieve. A reorganisation is a reorganisation, whether it will work or not … only time will tell.”

Another banking analyst says bringing down the IB cost by 30% is a “big task”. “If they succeed, it will be good for the group. Another interesting point is that in order for them to achieve the 15% ROE, CIMB will likely have to double their current profits by 2018. They must have at least RM7.5 billion to RM8 billion in net profit to achieve their 15% ROE target.

“Actually, what they are doing is bold and long-term positive if executed well. The change of roles for Lee and Kim will cushion a bigger fallout than if they were to completely leave the bank now.”

A head of a foreign securities firm says, “It gives the perception that there is some form of continuity. In the short term, with this new reorganisation, there will definitely be uncertainty, which will distract management time and potentially, they may lose some business.”

This is the group’s third major reorganisation since a restructuring in 2005 gave birth to the second largest banking group in the country. CIMB last embarked on one in 2011, when the group management committee led by Nazir was narrowed to 15 from 21.

Similarities between the current revamp and the one in 2011 are that the exercises resulted in the group CEO holding more than one function. As a result of the revamp in September 2011, Nazir held dual roles of group CEO and head of the Malaysian consumer bank. He was also involved in investment banking. In the current reorganisation, Zafrul will be acting CEO of the group and will also assume the post of CEO of wholesale banking.

“We will recalibrate many things in 2015, then have three full years to accelerate based on those stronger foundations to reach our targets for 2018. The T18 initiatives are focused on streamlining to get our cost structure right, focusing on priority areas where we have traditionally under-punched and strengthening the organisation culture,” Zafrul said of the T18 strategy.

“We have grown aggressively over the years and have a fantastic platform and brand. However, we have weaknesses and we can no longer depend on a high-growth operating environment. The strategic review has been about identifying areas where we are but should not be, areas where we need to be better and areas where we are already strong. These form the basis of an action plan to get us to our targets for 2018, which will no doubt require some near-term sacrifices,” he added.

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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 February 9 - 15, 2015.

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