THESE aren’t exactly what one would call the best of times for CIMB Group Holdings Bhd’s newly confirmed group chief executive Tengku Datuk Zafrul Aziz to be in the driving seat of the country’s second largest banking group.

CIMB, which was once a trailblazer in banking, is now one of the weaker performers in the industry. Its earnings have been declining for the last three consecutive quarters and it recently announced its worst quarter yet in terms of return on equity (ROE), achieving only 0.64% in its fourth quarter ended Dec 31, 2014 (4Q2014).

Amidst all this, some of the old guard at CIMB who have been instrumental in charting the group’s growth over the years are looking to retire. Zafrul, who had been acting CEO since last September, faces the task of building a new team that will be able to work cohesively in a tougher operating environment.

He admits that it has not been a walk in the park but that is not stopping him from diving straight into the business and making the necessary “tough decisions” in getting CIMB back into the game.

“The last six months have been very hectic. As you know, we spent much of the second half of 2014 looking at a potential merger (with RHB Capital Bhd and Malaysia Building Society Bhd) and crystallising our mid-term strategy (T18) in case the merger didn’t happen. It didn’t. So, we’ve hit the ground running in 2015, moving T18 into the execution phase.

“We’ve also reinvigorated our organisational structure and interlaced a mixture of new blood and experience in the new management line-up,” Zafrul tells The Edge in his first interview since officially taking on the top job on Feb 27.

“We announced our results — not our best — but at the same time, we bulked up our capital base significantly and have outlined some very clear plans to move the firm forward with T18. All in all, I am optimistic and the task now is to focus on executing our plans.”

CIMB saw its net profit fall 81% year on year to RM200.3 million in 4Q2014, mainly due to higher corporate banking loan impairments in Indonesia and Malaysia as well as a loss-making wholesale banking division.

Allowance made for impairment losses on loans, advances and financing almost tripled to RM919.2 million from RM308.5 million a year ago. Revenue dropped marginally by 3% y-o-y to RM3.67 billion.

For the full year, CIMB saw its net profit drop 31.6% to RM3.1 billion in 2014 from RM4.54 billion a year earlier. Allowance made for impairment losses, advances and financing jumped 131% y-o-y to a whopping RM1.52 billion. The group’s annualised FY2014 ROE was 9.2%, in stark contrast to the 15.5% achieved in FY2013.

Its cost-to-income ratio (CIR) increased to 58.6% — the highest in the industry — compared with 57.6% in 2013. It proposed a dividend of five sen per share for the quarter versus 11 sen a year earlier.

Despite the tougher environment, CIMB’s rivals like Malayan Banking Bhd (Maybank) and RHB Capital managed to grow their earnings last year. Maybank’s net profit grew a marginal 3% to RM6.72 billion while RHB Capital’s rose 11.5% to RM2.04 billion.

Zafrul says CIMB fared worse because it had the biggest exposure to the Indonesian market and a larger investment banking (IB) franchise regionally compared with the other local banks.

He shares that there is good and bad in the current trying times for the group. “The bad, you know why. The good is, it gives me the opportunity to do some of the changes that are required. When you have a period when things are not going well, you can make the tough decisions and make the tough calls. Showing that the numbers are good, delivering on all fronts, sometimes you can’t make the necessary changes that are required in the longer term,” he remarks.  

One of the tough decisions Zafrul had to make with his team was to close down CIMB’s Australian business and cut jobs in Hong Kong, Taiwan and Singapore, where a total of 168 people were laid off.

When asked if there is going to be more job cuts, Zafrul says the review is ongoing. “(If) we think we need to do it, we will continue to do it to achieve our targets.”

He adds that while the job cuts so far have involved just IB, the cost-cutting review is for the wider group.

While personnel expenses make up half of CIMB’s operating costs, the group also needs to be more careful about how it spends in order to keep a lid on costs. “We have to be stricter in looking at investments for the future in terms of ROI (return on investment). When there is a case to invest, we need to look at how much returns every investment will make for us. We have to be more disciplined,” Zafrul stresses.

CIMB has set itself an ROE target of 11% for this year, which does not take into account the restructuring cost because, as Zafrul explains, it is still hard to estimate how much this will be.

“This year is our recalibration year … so, there will be some restructuring cost involved. But that is to rebuild the base to accelerate towards 2018,” he says.

On Feb 6, CIMB outlined its new T18 plan and key organisational changes with a target of achieving an ROE of 15%, CET-1 ratio of over 11%, a CIR of below 50% and a 60% consumer banking income contribution by end-2018.

“We have begun work in all these areas. I said we would reduce our IB operating costs by 30% in 2015 and I am happy to tell you that with the closure of our Australian office and the recent round of staff reduction across our other IB markets, we have almost hit that target. And we will continue to look across our franchise for cost rationalisation opportunities,” says Zafrul.

“We will also practise good cost discipline by accelerating our business in the key areas of commercial, transaction and digital banking. I can share with you that we are already seeing some growth traction across these three businesses. Capital-wise, we bulked up our CET-1 by 210bps in 2014 to 10.1% and we are on course to meet our 2018 targets. And finally, I expect our refreshed organisational structure, mixing fresh perspectives with experience, to really drive more efficiencies and ideas across the firm.

“T18 was crystallised with an idea to recalibrate how we operate — there is a need for us to adjust to market realities and reconfigure our businesses so we continue to stay sustainable for the future. I believe we have made some brave decisions and will continue to do so.”

Last year, of its key regional operations, Singapore was the only one to show an increase in profit before tax — up 40.4% y-o-y in ringgit terms. PBT in Malaysia fell 9.8% on weak capital market activity and higher impairments from a large legacy corporate account, which analysts believe is related to the stalled Asia Petroleum Hub.

A surge in provisions for the coal and coal-related segment halved the Indonesian operation’s PBT while in Thailand, PBT declined 37.2% on lower equity contribution.

Pinning hopes on 2Q onwards

“This is the worst. The worst is over,” says Zafrul matter-of-factly.

He shares that in the first quarter of the current financial year 2015, the group will have to continue to make provisions for loans in Indonesia, albeit on a smaller scale than in 4Q2014. He does not think there will be a need to make more provisions for Malaysia.

Zafrul assures that 1Q2015 will not be as bad as 4Q2014. “We are hopeful that 2Q onwards will be better. Nobody can foresee the future (but) we can safely say 4Q was the worst.”

Analysts agree that the worst is probably over for CIMB but they remain cautious about its earnings prospects. Most of them have a “neutral” call on the stock.

“The worst is probably over but we see little near-term catalysts — 1Q2015 provisions are still an uncertainty, restructuring costs will have to be incurred before the synergies flow through, capital market activity will still be weak and operational turnaround at CIMB Niaga will be gradual,” Desmond Ch’ng, banking analyst at Maybank Investment Bank Research, observes in a recent report.

He cut his FY2015/2016 net profit forecasts for CIMB by 5% and 2% respectively.

Zafrul says the two steadiest markets in the region will be Malaysia and Singapore. He points out that the two factors that have been dragging down CIMB’s earnings are the provisions and the IB platform.

“We invested in expanding our platform into Asia-Pacific and the markets didn’t do too well. So, that cost structure is not able to support the expected revenue that didn’t come in,” he explains.

Given the situation, CIMB is restructuring its IB business to address the issue. “For example, we didn’t think the case to have Australia was strong enough, so we shut down Australia. We are not shutting down anymore in Asia-Pacific but we are scaling down to meet the kind of cost structure to support our P&L (profit and loss),” Zafrul says.

Under T18, CIMB is also shifting its strategy to focus more on its consumer banking business, which, Zafrul explains, is more stable than the wholesale banking business, the prospects of which are closely tied to the fluctuation of the capital markets.

As it stands, Zafrul expects the capital markets to be subdued over the next six months. “I think investors, at the end of the day, give higher PE, higher multiples, to consumer banking because it’s recurring, it’s steadier, so the flow of business is always given a premium when it comes to valuation. Our wholesale business is huge relative to that of other banks ... we’re therefore more exposed to capital market fluctuations.”

In Malaysia, one of the things CIMB is doing to grow its consumer banking business is to come up with products that can be sold or cross-sold using digital technology, Zafrul explains.

Banking analysts say CIMB’s cost of funds stood at 2.07% in FY2014 — lower than the industry average of 2.16%.

Too much too soon?

There’s no doubt that CIMB’s growth over the last few years was boosted by the breakneck speed at which it made acquisitions, thus gaining a presence in key Asean markets like Singapore and Indonesia.

However, its purchase of Royal Bank of Scotland in 2012, which transformed it into an Asia-Pacific IB player, raised questions as to whether it had overstretched itself.

The RBS buy led to a significant increase in cost for CIMB and analysts say it has yet to break even on the acquisition.

Did CIMB take on too much too soon? Was buying RBS a mistake?

“I think on the banking side, there’s no issue about (the acquisitions). We got the scale and if you look at the market cap from where we were 10 years ago, because of the acquisitions, we built our base and our network. But for IB, I must admit that, with hindsight, maybe we didn’t expect the market to shrink so fast. And I think when we built it, no one expected the market to be this way,” explains Zafrul.

“But the important thing is that we are addressing it now rather than hoping for the market to turn around next year. We know that this year is going to be tough for the capital markets, for the wholesale business. We should take action today, that’s what we have decided. I don’t think we want to wait anymore.

“People always say the danger is that if you scale down and six months later the market goes up, you won’t be able to capitalise on that. But I think that after last year and even the year before, you could already see it (that the markets weren’t improving) ... we see our competitors cutting down as well. Like in Australia, Nomura closed down before us.”

Zafrul says CIMB will be more tactical with M&A going forward and that it is still keen on expanding in the Philippines and Vietnam to complete its Asean footprint.

“In the next one or two years, if anything comes up (in those markets), we’ll do it. But there’s nothing right now. We’ve seen a lot of things but there’s nothing we want to proceed with.”

Apart from battling a highly competitive market, which is eating into its profit, CIMB is facing another conundrum, on its talent front.

A number of its old guard recently left the group or are in the midst of leaving, including former CEO of corporate banking, treasury and markets Datuk Lee Kok Kwan and former group CFO and CEO of group strategy and strategic investments

Kenny Kim. Lee and Kim, who were with the group for many years and were among former group CEO Datuk Seri Nazir Razak’s trusted lieutenants, are now in advisory roles. Lee will also become a board member.

“We have a strong second layer to move up. A few changes have already been announced and for CIMB, it is a big thing. I don’t think we have done such a major reshuffling in the last 10 years,” Zafrul comments.

Just last week, CIMB announced more changes to its senior management team that saw Tigor M Siahaan nominated as president director of CIMB Niaga and the appointment of Effendy Shahul Hamid as CEO of group asset management and investments and Kwan Keen Yew as group chief compliance officer.

Zafrul’s colleagues at CIMB say he brings to the group a younger vibe and fresh energy. “He uses social media quite a lot and encourages us to use it as well to connect with each other, which is good. But it can be bad too when your immediate boss starts sending you add/friend requests!” laughs a thirtysomething investment banker. “This is only the beginning. We will have to see how successful the execution of his plans is. Morale is pretty low now, given the job cuts and poor results ... but hopefully, he can get us out of this current low.”

Indeed, all eyes are on Zafrul to see how soon he can deliver CIMB from this difficult period and get it into the next and more challenging phase of its journey.

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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