This article first appeared in The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020

THE appointment of Datuk Abdul Rahman Ahmad as group CEO/executive director of CIMB Group Holdings Bhd came as a surprise to many.

The trained accountant may have accumulated a wealth of experience working in and helming different industries over the decades, including in private equity (PE), construction and media, but a banker he was not.

Replacing Tengku Datuk Seri Zafrul Aziz — who left to head the Ministry of Finance — Abdul Rahman was quick to admit that the 100 days in the top job at CIMB have “been challenging as a non-banker”.

Even worse, he had to learn the ropes in the midst of the Covid-19 pandemic, which he describes as a “once-in-a-lifetime crisis”.

Although he may not have had any banking experience prior to CIMB, the corporate captain is experienced in leading and turning around companies, which is why he believes he brings a “fresh perspective” to CIMB Group.

“Not being in the industry helps one to look at it with a different lens,” Abdul Rahman tells The Edge in his first media interview as head honcho of CIMB.

“Having (had the) privilege of being a CEO since I was 32 years old, leading organisations such as MRCB, Media Prima, Ekuinas and PNB (Permodalan Nasional Bhd) as well as playing board roles, I believe I bring a different perspective, both as an executive as well as a board member in terms of trying to deliver and create value for shareholders.

“If there is anything I would really like to focus on, it would be delivering in terms of shareholder value and, as you know, for financial institutions, if there is a single metric that determines shareholder value, it’s the ROE (return on equity).”

He emphasises that his main focus is improving CIMB’s ROE over the “next three to four years”.

The odds, however, are stacked against him. To say that he joined CIMB at a very challenging time is an understatement as even prior to the Covid-19 outbreak, CIMB’s ROE had already been declining.

From a historical high of 16.4% in FY2011, its ROE decreased for five straight years and had more than halved to 7.3% by FY2015.

There was a reprieve in the following three years when the ROE rose to 8.3% in FY2016 and hit 11.4% in 2018.

But it tumbled again to 8.5% in 2019, prior to the outbreak of Covid-19.

With lower ROEs, shrinking margins and rising costs, the pandemic has triggered a perfect storm.

Put in the hot seat in June, Abdul Rahman says his immediate focus is to assess the impact of Covid-19 from the borrowers’ point of view, and to help them navigate the challenging period. But he also needs to find a way to offset the impact on the bank.

Abdul Rahman was quick to look into cost initiatives and implement stringent cost measures, such as a RM500 million target cost reduction (or 5.5%) for year 2020.

Asset quality will also be tightened (see “Asset quality in focus”) as the group expands its loans judiciously with a focus on loan quality.

At the same time, Abdul Rahman recognises the need to have a clear strategy for the next three years.

Enter Forward23+, which he describes as a refinement of CIMB’s existing plan (Forward 23) and a continuation of the five-year plan that was developed previously. The refined plan will end in 2024 to take into account a year lost due to Covid-19.

 “We recognise the situation we are starting from — that we are effectively in a very challenging environment. So we need to make sure that performance going forward really improves compared with 2020,” he says. He stresses that this turnaround plan is “not just a transformation plan”.

Key targets have generally been retained, but how CIMB plans to get there will be different, given the adverse operating environment (see Forward23+ chart).

Another key differentiator is the group’s latest vision — to be the leading focused Asean bank rather than an Asean-focused bank.

“First, we have chosen the word ‘Asean’ because we really want to be what we call the local Asean bank. We studied different alternatives models, but we landed on that given that our DNA is effectively Asean. Asean provides us with a key differentiation, as not that many FIs (financial institutions) within the region have the breadth of our portfolio,” he says.

“We are the fifth- or sixth-largest bank in Asean by way of assets, second largest in Malaysia, sixth largest in Indonesia, with sizeable operations in Singapore and Thailand as well as Cambodia.”

In the past, being Asean to CIMB was to pursue a universal Asean strategy.

This time around, the group will not try to be everything to everyone.

“We will be clear about the segment that we want to compete in and play in those segments that we feel we have a clear proposition and we are competitive and where we are actually able to do it. That’s why we chose the word ‘focused’,” Abdul Rahman says.

Elaborating on the focused concept, he cites the example of CIMB Malaysia, which can be a universal bank as it is a prominent player in all market segments in the country, so it will double down on becoming a universal bank here.

On the other hand, in Indonesia, CIMB will not try to be everything to everyone. Instead, it will focus on business segments in which it has a strong presence, such as consumer, wholesale and wealth management.

Similarly, it will build a niche in countries such as Singapore and Thailand, where it will focus on Asean wholesale as well as the preferred wealth market. In Cambodia, the focus will be on community banking.

On the digital side, CIMB will be a selective investor in the digital space through partnerships to hedge for the future.

“So, these are the areas in which we will compete. We will not be what we call a universal bank in all the Asean markets. That is the key differentiation,” Abdul Rahman reveals.

The CEO explains the five strategic themes under Forward23+: delivering sustainable financial returns, disciplined execution,  customer centricity, transform fundamentals, and purpose-driven organisation.

On delivering sustainable financial returns, he says four measures will be taken — reshape portfolio, drive cost efficiency, digitise for value and focused investments.

“There are areas in which we know we need to improve. For instance, in our corporate and commercial businesses in Indonesia and Singapore, which this year had been hit by the specific provision we needed to make. So for those businesses, we really need to fix and turn them around ... And then,  to really double down in investment areas that we are confident that we can have a clear winning proposition,” he explains.

In the journey to deliver sustainable financial returns, Abdul Rahman also acknowledges that the group needs to reset its cost base.

“We do have one of the highest cost-to-income ratios among Asean leading banks; we need to address that,” he says. CIMB’s cost-to-income ratio was between 49.8% and 60.1% in the past five years (2015 to 2019).

Comparatively, Malayan Banking Bhd did better with a cost-to-income ratio of 46.7% to 48.6%, but Public Bank Bhd wins hands down at 30.5% to 34.4%.

Abdul Rahman’s RM500 million cost-cutting target will come from stringent expense management and deferring some non-critical expenditures as well as increasing productivity.

Are job cuts or branch closures on the cards? Abdul Rahman says the formulated plan excludes both as he does not see them as a needle mover any more in terms of cost, but stresses that “we need to be very focused on what we spend on”.

On potential investment areas, he reveals that this will include selective digital investments, investments that facilitate intra-Asean wholesale business, and the preferred as well as wealth management businesses.

Last year, CIMB missed its 9% to 9.5% ROE target when it managed only 8.5%, and prior to that it had revised down its T18 (Target-18) ROE target of 15% at end-2018 to 10.5% because of higher capital requirements and slower economic growth.

Throw in the adverse operating environment today and Abdul Rahman has his work cut out in achieving the new targets and delivering sustainable returns (see “Stock looks more attractive but investors still need convincing on Page 63).

“I think we also have to recognise that we need to improve our execution. That is why if we look at the execution, it is a key theme of our strategy. So we need to be focused and quite clear on how we can improve in terms of delivery, and we need to be transparent — recognise areas in which we need to improve and be very focused and say that these are the things that we want to do and then deliver that. It’s that straightforward,” he points out a matter-of-factly.

Clicks, CIMB’s consumer platform, is a key area in obvious need of improvement, given the stability issues.

“The data shows that our reliability in terms of Clicks is just not good enough,” Abdul Rahman says of the stability issues.

An immediate step was to stop further add-ons to the platform.

“Obviously, all our teams want to innovate, introduce new stuff, but I have a rule that until we can show three consecutive months of high reliability and stability — 99.5% — we cannot add anything to Clicks. We need to make sure that our platform is stable first before innovating,” he says.

“The market will remain sceptical until the group proves that it is able to deliver in terms of improvement in performance — both in the financial and non-financial metrics,” he adds.But the plan is to make improvements a step at a time, starting with shorter-term horizons.

“So to me, we are going to be very granular about what we are going to measure,” Abdul Rahman says, adding that CIMB is still developing its 2022 target as it remains unclear what the economic environment will be like moving forward.

There are opportunities in a crisis and the pandemic provides CIMB a chance to relook its business, fix the fundamentals and effectively make investments where there are openings, notes Abdul Rahman.

Wealth management — traditionally not its forte — could present opportunities.

The segment, he believes, has potential because of the low-interest-rate environment and attractive margins.

For example, CIMB’s Regional Preferred segment is only 3% of the group’s customer base but that 3% contributes 53% to CASA (current account, savings account) and 75% of wealth fee income, translating into revenue per customer that is 15 times higher than that from a mass customer.

Wealth management is certainly a new area of focus for the bank, which started off as an investment bank before morphing into a universal bank focused on consumer banking.

Previously known as “the investment bank in town”, it became less reliant on investment banking around 2015/16 in large part because of the dearth of such work.

“We have to move on. Life’s like that. Industries get disrupted, industries change. We’ve got to be realistic and focus on areas in which we can make a significant improvement and add value to our shareholders,” Abdul Rahman says pragmatically.

Another area where opportunity knocks is technology.

“Everybody recognises that this pandemic has accelerated tech adoption and I really believe that we can take advantage of that ...  despite the issues with Clicks, it is an extremely popular application,” he says. Monthly online transactions using Click’s application grew almost 60% from February to October 2020, reflecting the shift towards digital-centric banking, hastened by the pandemic.

Admitting to IT issues over the past two years, he says more investments have been made to overcome the problems, adding that 4% of CIMB’s revenue is ploughed into technology. The group is also looking to ensure that it gets more value on its technology investment.

Presiding as group CEO over CIMB’s first set of quarterly results, which saw it turning in one of its lowest earnings in the past 5½ years, Abdul Rahman is cognisant of the challenges ahead.

The last time CIMB posted a quarterly net profit in the RM200 million range was in December 2014 when large provisions were required for corporate banking loans in CIMB Niaga as well as in Malaysia.

“We just do not know the outcome ... I think it is very challenging because of the uncertainty and the uncertainty relates to this pandemic — something that all CEOs are grappling with,” he admits.

But fortunately, he can count on his experience in steering organisations through the Asian financial and global financial crises to help CIMB ride out the storm.

Given CIMB’s dismal share price performance, its shareholders are certainly counting on it.

Khazanah Nasional Bhd is CIMB’s largest shareholder and as at March 1, 2020, owned 23.77% of the banking group, followed by the Employees Provident Fund (13.32%) and Kumpulan Wang Persaraan (Diperbadankan) (5.96%).

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