KUALA LUMPUR: The country’s second-largest lender — CIMB Group Holdings Bhd — announced its first-ever group-wide mutual separation scheme (MSS) last Friday in a bid to trim staff costs, which currently makes up a little over half the group’s total annual overhead.

“The group needs to cut cost by about RM400 million per year to hit its targeted cost to income ratio (CIR) of 55% for this year. Staff costs currently makes up 55% of the group’s total costs. The group will also look at other cost cutting measures, such as its procurement and strategic review costs,” a source familiar with the matter told The Edge Financial Daily.

“Already, CIMB will save about RM200 million a year from the recent cut in IB [investment bank] cost, such as the scaling down of the group’s North Asia operations and the closure of its Australian operations,” the source added.

The cost savings from the MSS exercise remains unknown for now, said the source, as it will depend on how many people take up the scheme and the quantum of their individual packages.

Some 168 people were laid off after CIMB closed down its Australian offices and cut jobs in the group’s Hong Kong, Taiwan, South Korea and India operations earlier this year.

This time around, CIMB said the MSS was on a “purely voluntary basis” and its second MSS in four years, with the last one conducted in 2012 for its commercial bank operations, which saw 1,217 employees taking up the MSS offer.

“This is the first group-wide MSS for CIMB as well as for CIMB Niaga,” said the source. There are no plans now for MSS in other countries [the group is in] as 90% of its staff are from these two countries [Malaysia and Indonesia],” the source added.

The Edge weekly had written in February that banks are likely to cut jobs this year due to the tougher operating landscape eating into earnings caused by an expected rise in non-performing loans (NPLs) in the region, coupled with margin compression.

Commenting on CIMB’s downsizing, MIDF Research banking analyst Kelvin Ong told The Edge Financial Daily that the exercise is “expected” and is part of CIMB’s T18 (Target 2018) plan to drive its CIR down.

“There are basically two parts to CIMB’s T18 plan. First, it wants to drive revenue up and secondly it is to enhance cost and operating efficiency. The most immediate impact they can make now is to drive costs down and the MSS is a part of that. Right now it is about getting the right sizing for the business,” Ong explained.

It is no secret that CIMB has been plagued with a high CIR. For its financial year ended Dec 31, 2014 (FY14), its CIR climbed to 58.6% — the highest in the industry — from 57.6% in FY13.

The T18 plan, which CIMB announced on Feb 6, outlined a set of initiatives and key organisational changes to achieve a CIR ratio of below 50% by end-2018. It also aims to achieve a return on equity (ROE) of 15%, common equity tier-one (CET-1) ratio of over 11%, and a 60% consumer banking income contribution by that time.

CIMB, which was once a high-flyer among local banks, is now one of the weaker performers in the industry. Its earnings have been declining in the last three consecutive quarters (1QFY14: RM1.07 billion; 2QFY14: RM949.9 million; 3QFY14: RM890.27 million) and it announced its worst quarterly result in 4QFY14 in terms of ROE, which stood at only 0.64%.

Its net profit was down 81% on-year to RM200.3 million in 4QFY14, mainly due to higher corporate banking loan impairments in Indonesia and Malaysia, as well as a loss-making wholesale banking division.

For the full FY14, CIMB’s net profit declined 31.6% on-year to RM3.1 billion from RM4.54 billion, with allowance made for impairment losses, advances and financing jumped 131% on-year to a whopping RM1.52 billion. Annual FY14 ROE was at 9.2%, down 6.3 percentage points compared with 15.5% in FY13.

Banking analysts and industry observers said the group’s cost ballooned over the years as it had been expanding via acquisitions.

Its purchase of Royal Bank of Scotland in 2012, which turned the latter into an Asia-Pacific IB player, had raised questions as to whether CIMB had overstretched itself. Analysts said the group has yet to break even on the acquisition.

On the latest MSS, CIMB group chief executive officer Tengku Datuk Zafrul Aziz (pic) said in a statement: “This exercise is fully voluntary and is aimed at enhancing our efficiency levels across the board. This is consistent with ROE and CIR plans we have outlined for the future. Some of our employees from Malaysia and Indonesia have also enquired about these types of schemes, so this MSS is also a response to them.”

The scheme is said to have received backing from the board of commissioners and board of directors of CIMB Niaga, Indonesia’s fifth-largest bank in terms of assets, deposits, lending and branch distribution network, as the move is consistent with the Indonesian lender’s operating strategies.

Employees who are interested in the MSS are expected to submit their applications by May 29, 2015. Successful applicants will receive packages based on rank and years of service, as well as options for extended medical cover for three years and participation in re-skilling and outplacement programmes.

CIMB (fundamental: 1.05; valuation: 1.65) closed last Friday at RM5.96, down 4 sen or 0.67%, for a market value of RM50.6 billion.

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This article first appeared in The Edge Financial Daily, on May 18, 2015.