Cover Story: CIMB takes the next step forward

This article first appeared in The Edge Malaysia Weekly, on March 11, 2019 - March 17, 2019.
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With a jaunty gait and a bright smile, CIMB Group Holdings Bhd’s Tengku Datuk Seri Zafrul Aziz welcomes us into his office on the 30th floor of Menara CIMB in Kuala Lumpur Sentral.

It is Monday, just days after CIMB announced record FY2018 earnings. The group CEO is none the worse for wear from having steered the country’s second largest banking group through a gruelling four years.

The group made difficult decisions — for example, exiting investment banking in Australia and reducing headcount sizeably in Malaysia and Indonesia — as it looked to become more efficient and ultimately play catch-up with leading Asian peers under its T18 business plan.

That four-year plan ended last year and CIMB was able to deliver on all but two of its key targets.

Its FY2018 core net profit, minus one-off gains from divestments, grew 4% to RM4.66 billion, falling within analysts’ expectations. However, because of a weaker top line, CIMB missed a return-on-equity (ROE) target of 10.5% and a cost-to-income ratio (CIR) target of under 50%. These came in at 9.6% and 52.6% respectively.

The CIR was nevertheless a solid improvement from 59.1% in FY2014. CIMB beat expectations on other key fronts like improving its CET-1 capital ratio to 12.6% and increasing consumer and commercial banking’s contribution to the group to 61% (see chart on page 72).

“With T18, we showed that we can deliver [on tough targets]. I remember when we first launched T18 and met with investors, they were very sceptical. This was because, firstly, we had always been more of an investment/wholesale bank franchise and, secondly, we had driven expansion, so our cost growth has always been on the high side. Analysts laughed at us and, in fact, our share price tanked right after we announced the T18 plan because no one believed that we could deliver. But, slowly, we built up and we delivered,” Zafrul tells The Edge, clearly happy at having proved the critics wrong.

This has given CIMB the confidence to now accelerate its growth.



The group has just launched a new five-year business plan, Forward23, under which it has some ambitious targets to achieve by end-2023.

“T18 was always about us narrowing the gap [with leading Asean banks] because we were so far behind. Now that we’ve done that, Forward23 is where we want to accelerate to become the top three to top five bank in the region, in terms of metrics like CIR, ROE, CET-1 ratio and profit before tax (PBT),” Zafrul says.

According to him, over the last four years, CIMB’s improvements on these four fronts have outpaced those of most of its regional peers. By these measures, CIMB currently ranks somewhere in the middle-to-bottom of the top 13 regional banks, he says.

CIMB is aiming for a CIR of 45%, CET-1 ratio of 13% and ROE of 12% to 13% by end-2023.

With Forward23, CIMB wants to scale and accelerate growth in Malaysia and Indonesia; reposition and grow in Thailand, Singapore and Cambodia and, incubate and invest in Vietnam and the Philippines as well as go into new ventures.

“The thinking behind Forward23 is that we want to accelerate growth in some of the markets and we want to future-proof as well to ensure that we are sustainable in the long run. Malaysia and Indonesia will be key. These two markets will contribute 80% of the incremental value [to the group] over the next five years,” Zafrul says.

CIMB expects Indonesia’s PBT growth to increase 2.5 times in five years’ time, so its contribution to group PBT will be close to 35% compared with 20% in FY2018. Malaysia’s PBT, meanwhile, is seen growing 1.5 times.

“In fact, we expect Malaysia’s contribution to group PBT to be only around 55% [from 64%], with 45% coming from our overseas markets. That’s not to say Malaysia is not growing, but the rest will be growing faster,” Zafrul says.

“Repositioning” Thailand simply means the group will narrow its focus there, Zafrul says. “In the past years, we did everything from corporate, middle market, retail, all products. So we will streamline the business. For example, we have exited credit cards. We don’t need to be everything to everyone,” he explains.

According to Zafrul, Forward23 is ultimately aimed at transforming CIMB into a different, more agile financial entity.

The group will spend at least RM2 billion on technology-related investments over the next five years — double the amount spent on T18 — to protect or future-proof itself against growing disruption from non-bank players like fintechs.

“The plan has always been to disrupt ourselves before others disrupt us. So, you will see that there will be a lot of changes in the way we do things over the next five years. We’re looking at the skillsets of our people and relooking the organisational structure because we want to be more agile,” he says.

It is not like CIMB has a choice in the matter, he states matter-of-factly. The business of banking is changing so fast and CIMB needs to change its operating model to stay relevant.

“We think that banks today, if we don’t change the way we operate, if the operating model doesn’t change, we’ll have difficulty achieving [the kind of growth we want]. As you well know, in these [challenging] markets, our margins are being compressed. Hence, if we just continue doing  what we are doing today, we will never get there,” Zafrul explains.

Foward23 will revolve around the five pillars of customer, technology and data, people, ventures and partnerships as well as sustainability.


New ventures

Asked to elaborate on CIMB’s new ventures, Zafrul hints at mergers and acquisitions in the tech space.

There are currently 48 players in the e-wallet space in Malaysia and Zafrul believes that “only three or four” will survive the intense competition.

“You’ve seen the likes of Grab encroach into our system. They started off with ride hailing, then payment, e-wallet. So we need to be at the front end of that. We don’t want banks to be just another tool that other ecosystems use. We should be part of it. If not, our margins will continue to compress. We need to be as close as possible to the customer.”

He says CIMB is not currently in talks with anyone but is eyeing a few prospects.

“We, of course, have the benefit of Touch ‘n Go Sdn Bhd (TnG), which is doing quite well today,” he adds. TnG is 52%-owned by CIMB, with the rest of the equity held by UEM Group Bhd (20%) and MTD Capital Bhd (27.78%). In July 2017, TnG teamed up with Ant Financial, an affiliate of China’s Alibaba group, to roll out a mobile wallet ecosystem for Malaysians.

“If you look at TNG Digital Sdn Bhd, it is now the No 1 player in Malaysia and we think we will do better this year, [especially] when we add new functions to that e-wallet sometime in the third quarter. We’ve overtaken the likes of Boost to become the No 1 player right now, with just over three million users already,” he shares.

On the banking side, Zafrul says there are no plans for CIMB to embark on M&A in Malaysia under the five-year plan. It may, however, be opportunistic in markets like Thailand and Indonesia.

“At home, I know there are a lot of rumours but we’re not looking at anyone. But in other countries, we’re more open,” he says.

CIMB is currently present in all 10 Asean markets. “We’re still new in Vietnam and the Philippines, but Thailand, we’ve been there long enough, and we’re just barely in the top 10. To make a difference, you need to be at least top 5 to top 10, so Thailand is a market where we’ll be open to looking at. In Indonesia, we’re top 5 there, but you never know, we could be top 3,” Zafrul remarks.

He says these markets make more sense to expand in. “Vietnam, Indonesia and the Philippines ... these three markets will have the largest delta, largest changes in terms of banking revenue over the next five years — over 10% CAGR (compound annual growth rate) compared with 4% to 5% in Malaysia.”

Net interest margins in Indonesia’s banking sector are still above 5%, one of the highest in the world.


No walk in the park

It will not be easy for CIMB to get to where it wants. Growth in Malaysia’s economy is largely seen moderating over the next two years and there are still global uncertainties to contend with, like the US-China trade war and Brexit. Last year, the economy grew 4.7%, markedly down from 5.9% in 2017.

Analysts also question whether CIMB can hit its CIR and ROE targets, considering the heavy investments it is making in technology alone.

Zafrul admits it will be challenging. “You’re right, especially for Malaysia. There is some moderation in GDP growth — this year we’re forecasting around 4.5%, but the market is saying between 4% and 5%. But if you remember, during T18, there was also a period where we had some challenges, particularly in the region, with Brexit, the trade war and, before that, the Greek crisis. They did not directly impact Malaysia, but they did slow down our trade finance business.”

There will be cycles over the five years, Zafrul says, but the key thing is for CIMB to monitor the situation closely and to stay agile.

“Basically, we need to be realistic. If revenue is being challenged in a way that we don’t think we can reach that level [of growth that we want], we need to then invest slower. But, having said that, if you look at our markets outside Malaysia … in 2018, those were the markets that helped boost us. So, in a way, diversifying our revenue base does help. Indonesia’s earnings improved by 20% last year, Thailand improved by close to 100% and Singapore, 20%. So we’re still confident that these other markets will be doing better,” he says.

There could also be improvements in its wholesale banking business. “You might find it hard to believe, but we have seen that wholesale banking is now back to normal. The volatility in capital markets is back ... so we are back to the normal run rate that we’ve seen before, albeit slightly slower than the years before. Last year was a really bad one for wholesale banking, so we think we will do better this year,” says Zafrul.

PBT from wholesale banking — comprising corporate banking, treasury and markets as well as investment banking — fell 31.7% last year to RM1.75 billion.

Consumer banking, however, fared well, with PBT growing 15.2% to RM2.96 billion. Its growth in key segments like mortgages, cards, automotive loans and CASA (current accounts and savings accounts) over the four years outpaced industry growth in Malaysia.  CIMB will continue to rely on those segments to drive growth, Zafrul says.

The group has set a loan growth target of 6% for this year. In Malaysia, it expects loans to grow between 6% and 7%, higher than the 5% analysts are projecting for the industry.


Jury still out

Analysts are mostly neutral on CIMB’s five-year plan for now.

“The foundations have been laid under T18 and now it’s about them pushing hard on growth.  Since it will still continue to spend heavily on IT, where are the new revenue generators coming from, we’re not sure. We need to know more details,” an analyst with a local research house tells The Edge.

Bloomberg data shows that of at least 23 analysts who track the stock, more than half (14) have a “hold” call, while eight have a “buy” and one, a “sell”. The average target price is RM6.28.

The stock, which has shed 21.5% over the last 52 weeks, closed at RM5.39 last Friday.

Zafrul has been captain of the ship since February 2015, although he had been acting group CEO since September 2014.

Many of the old guard in CIMB left in the past four years, even as Zafrul hired new blood. Those who left include Datuk Seri Nazir Razak, who retired as CIMB chairman late last year ahead of the end of his contract this August. Datuk Mohd Nasir Ahmad, one of the board members, took over on Oct 20.

In the latest departure, Datuk Kong Sooi Lin retired as CEO of CIMB Investment Bank on

March 1 after 25 years with the group. Her deputy, Jefferi M Hashim, has taken over.

Zafrul says there are not likely to be much more changes to the current management line-up.

All eyes are now on Zafrul to see whether he and what he refers to as his “dream team” can deliver yet again with Forward23.

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