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This article first appeared in The Edge Malaysia Weekly on February 12, 2018 - February 18, 2018

GIVEN the increasingly challenging banking landscape, it is not surprising that bank owners are considering exiting the industry, says CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak.

“Banks are facing a very difficult operating environment vis-à-vis margin contraction, technology and regulation. So, you would expect — in this dramatically changing situation — that people who used to own banks may not want to own them anymore,” remarks Nazir in a recent interview with The Edge.

“It’s not a surprise. Anyway, for most businessmen, anything is for sale at the right price.”

His comments come on the back of two owners of banks announcing their impending retirement.

In January last year, AMMB Holdings Bhd chairman Tan Sri Azman Hashim announced that he would be exiting six entities in the AMMB group over a two-year period while in August, Public Bank Bhd founder and chairman Tan Sri Teh Hong Piow announced his plan to relinquish his chairmanship of the banking group early next year.

Azman holds 13% equity interest in AMMB Holdings while Teh has the lion’s share of 23.4% in Public Bank.

While these two doyens have made their intentions public, there are also rumours that other owners and controlling shareholders of banks are looking at pulling out of the industry.

But even as they appear readier to give up their stakes, it has become more complicated now to exit banks because their intrinsic value has changed in the wake of the digital disruption currently shaking up the industry.

“For instance, CIMB is going to reduce the number of its branches in the next few years. What does that mean? If I merge and acquire another bank, I would shut down every branch of that bank. And what does that mean? I won’t pay the seller for the branches because those days a bigger branch network was worth something [but less so now],” explains Nazir.

The veteran banker admits that banks have been slow to embrace technological change — he says they have been “asleep” — largely because of the conservative nature of the industry whose regulations have ensured that banks remain boring.

“Regulators don’t particularly like banks to be innovative. There is a legacy thinking that once banks became too innovative, you had all those unconventional derivatives and a lot of people got hurt. This is actually ironic because for banks to survive in today’s environment, they have to be innovative! So, it’s tough to be a banker today,” he observes.

Now in the final year of its Target 18 (T18) mid-term plan, CIMB has seen an improvement in its financial performance and share price since hitting a low in 2016. As at Feb 7, its share price had gained 97.24% to RM7.08 from RM3.59 on Jan 21, 2016.

For the nine months ended Sept 30, 2017, the banking group’s net profit rose 26% year on year to RM3.41 billion while operating income improved 11.7% to RM13.11 billion.

Its CET1 ratio stood at 12% as at Sept 30, 2017, surpassing the T18 target of more than 11%, while its cost-to-income ratio was at 52.1%, still below the T18 goal of 50% but better than the previous corresponding period’s 54.6%.

Annualised return on equity for the nine-month period was at 9.8%, slightly below the 10% to 11% intended mark.

As the T18 plan nears its end, Nazir says the banking group’s next strategy will be very different, given the vastly changed operating environment. “Now, banks are not sure who their real competitors are. Should I be sitting here worrying about Maybank, Public Bank and all that or should I be worrying about Grab and Alibaba?”

When asked where he sees CIMB in five years in terms of asset size and shareholders’ funds, Nazir says it would be “very retro” to have those kinds of targets now. He stresses that banks are here to create value for shareholders and that value can be created by expanding, shrinking or diversifying. But with the new operating landscape not fully understood yet, he would rather not set any targets now.

“I was telling the CEO the other day, ‘Look, when I was CEO, you know what innovation was? Innovation was look to the West, copy, adapt and introduce. But today, the world is flat and we are just as advanced as the banks in the West.’ And guess what? All of us are scrambling to know what to do vis-à-vis the new world,” he remarks.

The next phase, he says, is for banks to take advantage of what they have and come up with a business transformation that will make them competitive again. It is about reshaping the notion of banks being a “horrible necessity” from a customer’s perspective to an institution that customers like.

“Banks have to transform, get better connected with customers and make customers happy with them. Actually, we can do that because we’ve got the balance sheet and we know you very well. But have we been able to take your data, slice it and dice it and come up with ideas and communication such that you like us?”

Nazir opines that the next 5 to 10 years will be the time of reckoning for banks, where some will do well but others might fade away because of their inability to move fast enough with the changes engulfing the banking industry.

“There will be three types of banks. The ones that transform by using what they have and their capital — I think they will do well. Then you have the banks which can’t hold on to the customers, and all they do is to lend and take deposits where customers don’t see them again and they are just in the background somewhere. And there will be a third group of banks that will die because they lend a lot of money to big businesses that did not prepare for technological change or the Fourth Industrial Revolution,” he explains.

 

Asean at Davos 2018

Nazir, who was at the World Economic Forum (WEF) in Davos last month, says Asean did not receive the same kind of publicity that it did in the previous years because the grouping’s representation was limited this time around. This was due to a clash in events where the WEF coincided with the Asean Heads of State meeting that was held in India.

Nevertheless, the dialogues on Asean, which Nazir chaired on behalf of the Asean Regional Strategy Group (RSG), still took place and went well.

“We issued this report prepared by the RSG working with the WEF and the Asian Development Bank on Asean in the Fourth Industrial Revolution. We presented the report to the Heads of State in Manila [last year]. One of the items on the agenda was to try to push the report further along with emphasis on getting Singapore (the chairman of Asean) to embrace its recommendations.

“We made good progress there. Deputy Prime Minister Tharman [Shanmugaratnam] seemed to welcome it. And I’m hopeful that Singapore will accept some of those recommendations,” he says.

The trust of the report is that the Fourth Industrial Revolution will require Asean to accelerate its integration and deal with priorities that are different from those in the Third Industrial Revolution.

“The central thesis is that the Asean way got us here but will not get us there, so we had better make those changes now. Otherwise, Asean will disappoint and Asean will not be the winner in the Fourth Industrial Revolution as anticipated,” Nazir concludes.

 

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