Thursday 28 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on August 15 - 21, 2016.

 

AFTER a lacklustre decade of operations in Malaysia, Al Rajhi Banking and Investment Corp (M) Bhd (Al Rajhi Malaysia) is now ready to make a fresh go at growing its Islamic banking business here more aggressively, particularly in the corporate segment.

Its new CEO Steve Chen, who came on board in April, says the group is now on a better footing to go all out to garner more business, having spent the last few years cleaning up early year loans that turned sour.

It has been a busy few months for Chen, who interestingly is the first non-Muslim CEO of an Islamic bank here. He and his team are in the midst of finalising their business plans for the bank for the 2017-2020 period, for which he expects to get board approval next month.

The plans, in a nutshell, revolve around the group continuing its focus on retail and corporate banking but placing greater emphasis on growing the corporate business faster.

“We’ve received some very good feedback from the board on our plans. They are generally supportive of the direction we’re taking. It’s just a matter of [deciding on the] phasing and execution of those plans, that’s all. We are quite confident that by our next board meeting, sometime in September, all these will be finalised,” he tells The Edge in his first media interview.

In the meantime, however, to enable those plans, Al Rajhi Malaysia has been hiring staff aggressively, particularly on the corporate banking side, and making significant investments to improve its systems and technology.

The bank had a staff strength of about 660 as at end-2015, and it hopes to breach the 1,100 mark in four years. It has hired more than 130 people in the last four months for its front and back offices.

“2016 is a year of rebuilding for us, where we get our house in order, get the people we need, the systems we need, identify the areas that we need to improve on ... and have very clear road maps on how we want to execute them. 2017 onwards is about how we execute the list of action plans that we have set,” says Chen.

“In terms of earnings, we think the results [of all that we have been doing] will probably start to show in 18 months’ time. And beyond that is where we’ll really see a significant uplift in earnings trajectory.”

Al Rajhi Malaysia, one of 16 Islamic banks in the country, is a wholly-owned subsidiary of the world’s largest Islamic bank by assets, Al Rajhi Bank of Saudi Arabia. It was among the first Middle Eastern financial institutions to set up operations here, in October 2006, when Malaysia opened up its Islamic banking sector to foreign players.

However, like the other Middle Eastern lenders here, namely Kuwait Finance House (M) Bhd and Asian Finance Bank Bhd (AFB), Al Rajhi Malaysia has yet to really make a mark. This is partly due to the tough competition from local rivals that have the benefit of much larger balance sheets and retail networks.

Critics also point out that Al Rajhi Malaysia’s early years were marred by leadership that did not have a good understanding of the local market, and lax risk management practices.

It made losses in its first two years — a net loss of RM96.81 million for the year ended Dec 31, 2007 (FY2007), which narrowed to RM59.71 million in FY2008 — before turning around the following year. It has since stayed profitable.

Prior to Chen taking the helm, Al Rajhi Malaysia had been without a captain since late 2014, when the previous CEO, Datuk Azrulnizam Abdul Aziz, quit.

“Yes, over the last two years, we’ve been pretty quiet without a CEO ... but it hasn’t been idle time or time idled away. We did a lot in terms of cleaning up the portfolio. Today, if you look at our portfolio, I’m quite confident we don’t have any surprises lurking inside — our current gross non-performing financing (NPF) ratio stands at 0.43% [compared with 4.6% in FY2010, at its worst]. We compare very favourably against the industry average,” says Chen.

“So, if you look at where we are today, I think there has never been a better time to grow. We have a clean portfolio, a good platform on which to build our business and we’re really excited about the future of this organisation.”

He says most of the problematic loans were from the early years. “They were connected to personal financing and there were some losses taken on the corporate side as well. But the good thing is, if you look at the vintage, they’re actually quite old, going back to the first five years of operations of the bank. In latter years, it has been quite good.”

Last year, Al Rajhi Malaysia was the only one of the three banks with Middle Eastern roots here to register profit growth. Net profit grew to RM11.76 million from RM4.8 million in FY2014, helped by write-backs and lower provisions.  Allowance for impairment on financing fell sharply to RM3.67 million from RM13.96 million.

In comparison, Kuwait Finance House, the largest of the three, slipped to a net loss of RM37.18 million in FY2015 from a net profit of RM92.83 million the year before. AFB, meanwhile, saw a sharp drop in net profit to RM527,073 from RM14.97 million previously.

Chen says the “reboot” of Al Rajhi Malaysia will cover five areas. “One, to accelerate growth; two, to become the employer of choice; three, customer focus; four, digitisation; and five, execution focus. So we’re doing a lot of work around this and obviously, there are short, mid and long-term goals,” he says. Chen declines to go into the details of it, given that the board has yet to approve the plans.

However, he says the “endgame” is to get the bank’s return on equity to at least 15% in probably five to six years’ time. This is certainly ambitious, considering its ROE was about 2% last year.

“The rebooting plan is really about relooking at what makes sense for the bank going forward. Obviously, we’ve got shareholders who have been very patient with this business, what with it being Al Rajhi Bank’s largest investment outside Saudi Arabia. They continue to be patient and we have agreed on a course of action, which we believe we have the ability to execute,” Chen remarks.

Al Rajhi Bank also has investments in Jordan and Kuwait, but Malaysia remains its largest outside Saudi Arabia.

 

Rebalancing moves

Al Rajhi Malaysia’s loan book is relatively small with gross loans at about RM5.07 billion as at March this year, split almost equally between retail and corporate loans.

“I think in terms of scale, in terms of absolute growth, it will be more corporate bias going forward. Right now, it’s more or less a 50:50 mix ... corporate is about RM3 billion and retail, RM2 billion. The ideal mix for us is maybe 70:30, going foward ... probably in two years’ time,” Chen says.

He expects financing growth of no less than 17% a year — the Islamic industry average in the last few years — over the next three years. However, he stresses that the bank is not going to be growing assets just for the sake of it. 

“Asset growth, for the sake of asset growth, to me, is just meaningless unless you’re getting the right returns. The retail banking business right now is pretty challenging from a margin perspective. So, given our current balance sheet size, as we build both businesses (retail and corporate), the challenge for me is how do I balance the portfolio to ensure that I’m actually deploying our liquidity, our risk capital, to where I’m getting the right returns. At this point in time, we think the corporate and commercial space is where those returns are comparatively higher,” he explains.

In the retail banking space, he says personal financing (PF) and automotive financing will continue to be key areas of focus for the group. “Mortgages will also be a focus for us. However, all decisions we make are going to be based on returns,” he adds.

Currently, mortgages make up more than half of its retail loans and PF, 30%.

PF accounts for slightly over a tenth of the bank’s total assets. “We haven’t determined yet as to what is a healthy percentage, but certainly 10% to 15% of total assets is probably where I would want it to be. But taking into consideration that the corporate book is actually going to be growing a lot more rapidly, that gives me some room to grow,” Chen says.

Cognisant that PF and vehicle loans, in particular, are vulnerable areas in a slowing economy, he says the bank has revised its underwriting standards to ensure that it is taking the right risks.

On the corporate side, he says the group is looking for top-tier commercial clients. “All I can say is, the direction we are taking today is quite different from what we’ve been doing in the past. In the past, it was very focused on the larger entities, GLCs (government-linked companies) and all that. Now, we’re focused on, if you will, mid-cap companies. We have ambitions for SMEs, but it’s important for us to build a critical mass for our mid-cap book first, or we call it commercial, before we start venturing into SMEs,”

The bank also wants to leverage its Saudi roots and tap, particularly, the haj and umrah traffic.

“We need to build upon what we have today to give more value, to capture greater flow of the haj and umrah traffic. And, obviously, there is pretty sizeable trade between Saudi Arabia and Malaysia — trade between the two is about RM4 billion a year. So, it’s something we need to work on in terms of connecting that corridor and how we can help Saudi investors who are coming to Malaysia as well as Malaysians going to Saudi Arabia,” says Chen.

“The other thing is, while we don’t have a debt capital market team at the moment, I don’t think it will impede us from being able to bring debt issuers from the Middle East to Malaysia. Obviously, there’s still a pool of Islamic-compliant liquidity in Malaysia that is looking for assets to invest in.”

Chen says he does not discount undertaking mergers and acquisitions to grow in the region, especially in Indonesia. For now, however, the focus will be on organic growth within Malaysia.

“There’s no rush to go regional,” he remarks.

At its height, the bank had 24 branches in Malaysia, but has since closed two. Chen does not discount opening more branches. 

On a personal note, Chen, who has held senior positions in foreign banks like JPMorgan, says he is “thoroughly enjoying” his new role. This is his second time running a bank — the first was in Vietnam, where he was country executive for The Royal Bank of Scotland. Prior to joining Al Rajhi Malaysia, he was the chief operating officer for corporate and structured finance at Hong Leong Bank Bhd.

He downplays being the first non-Muslim CEO in an Islamic bank here: “It’s not something that I think about a lot. My role here is to deliver to my stakeholders.”

Indeed, all eyes will be on Chen to see how he delivers the returns. 

 

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