Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

LAST year, CIMB Group Holdings Bhd saw consumer banking become the largest contributor to its profit before tax — a first for the group, whose strength traditionally lay in investment banking. Clearly, the group is no longer heavily reliant on the latter.

Has this been a conscious structural shift or a cyclical one?

Some may say tepid deal flow led to the smaller contribution of the fee income business, thus making sense of the increase in consumer banking. And it does not seem likely that wholesale banking — which includes investment banking, corporate banking and treasury and markets — will be the dominant income generator at CIMB, like it was when the economic climate was conducive to deal making.

In fact, growing consumer banking’s income contribution is one of CIMB’s Target 18 (T18) goals.

The group outlined T18 in February 2015, targeting a return on equity of 15%, common equity tier 1 ratio of more than 11%, cost-to-income ratio of less than 50% and consumer banking income contribution of 60% — which includes contribution from commercial banking — by end-2018.  

In an exclusive interview with The Edge, group CEO Tengku Datuk Seri Zafrul Aziz says the banking group is learning to engage with markets that it never focused on before.

“We want to go back to our natural market share. In Malaysia, we should be top two [in the small and medium enterprise market] but we’re not [now]. We’ve been conservative in our engagement with the SMEs; we’ve been very corporate. Even in consumer banking, we’ve always been ‘preferred’ rather than ‘mass’. These are the markets that we need to tap into and where you will see growth as we start engaging with them.”

Noting the huge potential of consumer banking, he says the business has done “very well” because of its smaller scale compared with wholesaling.

Nevertheless, stresses Zafrul, who took over the CEO’s reins from chairman Datuk Seri Nazir Razak, CIMB has not sidelined wholesale banking. Indeed, it has managed to maintain its position on the league table.

“We’ve always told our staff that we cannot drop off the league table,” says Zafrul.

Analysts believe things will pick up in CIMB’s wholesaling this year as they expect the business to recover from last year’s low base effect. UOB Kay Hian Research has projected an 8% year-on-year growth in fee income this year.

“During the 2013 general election, brokerage and underwriting charges were the drivers of CIMB’s fee income growth,” says the research house.

Meanwhile, CIMB is starting to see the results of engaging with new market segments. “Last year, we were surprised to see loan growth of 10.5% in Malaysia — double the industry’s. All our segments grew and, yes, we went into markets we had never before. We could do that because we structured our team in such a way that we were clear about the areas we were weak in and we invested in them — technology, people and processes.

“It was simple for consumer banking. We grew the fastest in mortgages, personal financing and credit cards in Malaysia because we were better in our data analytics and mining, which enabled us to better target customers that needed those products,” explains Zafrul, whose previous jobs were mainly in investment banking.

In the financial year ended Dec 31, 2016, consumer banking contributed RM2.27 billion or 46.4% to CIMB’s profit before tax while wholesale banking accounted for RM1.96 billion or 40.1%. Revenue came in at RM16.05 billion, up 4% from the previous year, while net profit improved to RM3.56 billion from RM2.85 billion before.

 

Are the targets being met?

According to Zafrul, since taking the hot seat at CIMB two years ago, his journey has been challenging and humbling. The banking group saw significant changes in its leadership and strategy in a lacklustre economic environment.

“The economy grew but not as much as we thought it would. Fortunately, given what we had done over the last two years, we have been able to navigate the difficult times,” Zafrul comments.

When CIMB launched T18 in 2015, its cost-to-income ratio stood at 59%. The aim was to reduce this to less than 50% by end-2018. As at FY2016, the group had managed to bring the ratio down to 53.9%. It more than achieved its T18 common equity tier 1 ratio as at FY2016, with 11.3%.

“We are halfway through T18 and we didn’t expect the markets to be so challenging but we adjusted. Despite our income not growing by 9% to 10% as anticipated, our common equity tier 1 ratio has improved because we made some very difficult decisions on cost and accelerated some of the things we needed to do,” says Zafrul.

He credits members of his senior management, or his “dream team”, with helping drive T18 and meet its targets.

Analysts believe CIMB is on track to achieve most of its T18 goals except ROE, which Zafrul admits may be difficult.

Says an analyst with a local bank, “They are making progress … but the ROE target is off, which is why management revised it down to between 10.5% and 11% from 15%. That they would miss the target was expected, given the current difficult operating environment at home and abroad like in Indonesia and Thailand.”

An analyst with a foreign bank concurs. “They are on track but it is not possible to meet the 15% ROE target they have for T18. I think they should be able to get to 9.5% this year.”

While an ROE of 15% is out of the banking group’s reach now, Zafrul says it should be at least on a par with or better than that of its regional peers by 2018.

CIMB’s ROE stood at 8.3% as at FY2016, falling short of its 10% target for the year due to impairments.

“Our engine is running well with revenue hitting RM16 billion last year. We are managing cost better and we’ve focused on ensuring there’s no capital dilution. What we need to improve on now is to be more vigilant for asset quality.

“Malaysia has been a good story of how we have managed to maintain low provisions and impairments. But we need to make sure our regional operating model and our teams overseas continue to improve on this. If they do that, our numbers would be better, provided that the other aspects continue to grow as well,” says Zafrul.

CIMB is expecting loan impairment to be lower this year than in FY2016 as it is expecting the Thai, Indonesian and Singaporean markets to grow and the home market to remain stable.

“We are more optimistic about this year because we think the Indonesian economy is finally turning around and being one of the largest banks there, we will see an improvement. Last year, loan growth in that country was zero,” comments Zafrul.

Maybank Investment Research says asset quality in Indonesia has yet to show any sign of recovery with the industry’s non-performing loan ratio rising to 3.1% in January this year from 2.9% in December 2016. Nevertheless, PT Bank CIMB Niaga Tbk has not seen a significant increase in NPLs.

“CIMB Niaga’s credit cost is expected to gradually decline to below 200bps by end-FY2017 but guidance is that it should average around 200bps to 220 bps in FY2017 versus an average of 273bps in FY2016,” says the research house.

It adds that there is upside potential for earnings if credit costs surprise positively. This is based on its forecast that every 5bps reduction in credit cost will improve earnings by 3%.

While only halfway through T18, the banking group is already pondering its next move. Zafrul says post-T18, CIMB will probably focus on growth.

In the meantime, the banking group unveiled its new tagline: “Forward”.

“‘Forward’ is CIMB’s evolution. We’ve had ‘Asean for You’ for eight years now and we’re transitioning to ‘Forward’. We’re changing our proposition: it’s about moving forward. Moving from an investment bank to a universal bank to a regional universal bank and today, we need to move forward for our customers. ‘Forward’ means to position ourselves to move forward for our stakeholders, customers, staff and shareholders.

“This is also a part of T18 because we want people to work better together as a team. The whole bank is complex as it cuts across divisions and geographies to work as one. [We want to] cut the silos. It has to come together as one,” Zafrul asserts.

“It’s about focusing on the customers, staff and shareholders. It’s about the people.”

Over the last one year, CIMB’s share price has gained nearly 28%, from RM4.50 to RM5.75 last Wednesday.

Maybank Research has a “buy” call and target price of RM6.30 on the counter. It says valuations are still decent with the stock trading at a prospective FY2017 price-earnings ratio of 11.1 times.

UOB Kay Hian Research maintains its “hold” call on the share with a target price of RM5.60. It opines that the banking group’s strong earnings recovery has been factored into the share price, as reflected in its earnings growth assumption of 21% for this year.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share