Business

Saturday August 8, 2009

A CIMB transformed

By JAGDEV SINGH SIDHU


It streamlines operations after M&As to become leading regional entity.

GROWING the banking business regionally is now squarely on top of the CIMB Banking Group’s agenda as it navigates to put into place the acquisitions and mergers that have taken place in its key markets in South-East Asia.

Closer to home, the bank is now getting into gear with the second part of its transformation process following the acquisition and merger with Southern Bank Bhd by utilising the key strengths of its overseas operations in a drive to make its network operate more effectively.

This is being done in anticipation of the major shift in the way banking will be done in the aftermath of the global financial crisis that has swept through the big banks in the Western world.

“One growth trajectory is the momentum from the transformation onshore (in Malaysia) where we are still underfiring even though we have made huge strides over the past three years.

“A lot of fixing has been done and we can go through Transformation 2 where I think there is still some upside to be done locally,’’ says CIMB Group chief executive Datuk Seri Nazir Razak.

“But the sharpest growth will come from other markets. For Thailand, in 2009, we will spend on fixing and I don’t expect any material contribution from there. Once we fix it, the growth trajectory will be quite sharp.

“The environment in Indonesia is high growth where the banking penetration is still very low. Margins are still relatively high and the potential there for us is huge. In Singapore, we are so small but the potential for high growth is there,’’ he adds.

In Transformation 2, CIMB is addressing systems capability and it aims to aggressively reconfigure its branch network. Where applicable, the group will reduce the number of branches and relocate some of them.

As the banking crisis unfolded in the West, the CIMB group managed to still chalk up increasing profits as it benefited from the improvements in key business segments. “The results can been seen in our financial numbers. The turn in consumer banking took place in 2008,’’ says Nazir.

StarBizWeek: What is the future of the banking industry? What are the major changes that will take place in the next five years?

Nazir: You are asking that question at an awkward time when the world is not clear about the future of banking.

Capital, accounting and regulation are still uncertain. It will result in greater regulation, a change in minimum capital requirements, accounting policies, etc.

Over time, the market will liberalise to a greater extent and we have to compete. We have an organisation with a regional scale to do that. We have the economies of scale to build products and the ability to do research and development.

What sort of consumer segment will become dominant in this new era?

We consider ourselves in a position to benefit from this disintermediation through the investment banking side.

Large corporates going to the debt market means consumer banking will become more prominent. The bond market disintermediation is a pretty significant business.

Then there will also be a marked shift towards transaction banking – such as managing payments for customers, payroll and trade finance – in a bigger way. A lot of global banks are shifting that way.

Do you envisage investment banking becoming larger than, say, commercial banking?

It depends on the corporate strategy. We already have a sizeable IB (investment banking) business, so some of the corporate lending will migrate to the bond market side but the growth trajectory for us is pretty much on the consumer side.

Old-legacy banks such as BCB (or Bumiputra-Commerce Bank – the previous name of CIMB Bank) had many lost years in consumer banking and we have to catch up on that.

Our retail deposits are like RM35bil, which is well short of the top two. They are north of RM50bil in terms of retail deposits. That certainly does not commensurate with our branch network. We have been the fastest growing in all segments of retail banking.

What can you do to improve your competitive position and what are the new segments you are looking at?

There is a whole suite of stuff. In terms of service, we have done more than just rebranding. We have done a complete overhaul of service levels at the branches, enabled by a new branch framework.

We are now going through Transformation 2. Transformation 1 was to put SBB (Southern Bank Bhd) and BCB together but we did not change the core banking systems.

Does a merger offer any benefits?

One of two things will have to take place for a domestic merger. One is that it must come very cheap. The second is it must come with the ability to retrench in large numbers. Neither of those two are realistic expectations.

What about a regional merger?

That is not impossible but it is not something we are considering in the medium term because we may be selling our shareholders a little bit short, given the expectations of how much value we can create with what we have.

We just bought the bank in Thailand, where after you buy you transform. And we just merged in Indonesia where we think the upside is huge. Until you show clarity in terms of what you can achieve, no one is going to give you the right premiums. So that is something we are not considering.

What will be the three major shifts that will be taking place in Malaysia over the next few years in terms of banking?

The world will change in terms of bank regulations and Malaysia will also change. To what extent that will affect us, I am not sure because you take the leverage factor of coming down from where the Western banks are to maybe not far from where we are. There will be subtle ones like compensation, Basel II and FRS 139.

Second, I guess, is the further liberalisation of the banking industry that has been articulated but is something that we will have to contend with, although it is very much within our expectations.

Third, I think there could well be a power shift in banking globally. It is something we all have to contend with. There may be a significant shift in power to Asian banks, particularly Chinese banks.

In terms of the shift in the power of banking to Asian banks, what sort of opportunity can CIMB tap to fill the gaps left behind by the Western banks?

A great deal. Our positioning in many aspects is to fill that vacuum for the Thai and Indonesian customers. It’s very real that we are now getting requests from multinationals who never answered our calls in the past.

In the past, they said they must go through global banks. Suddenly that has changed.

The second is the intraflows of activity as Asia trades more with itself. As Asian countries trade more with themselves, the more natural will the conduit of our regional operations become.

There is greater appreciation post-financial crisis of the value of Asians understanding Asians.

There are obviously the benefits of expansion in the key markets in South-East Asia. What about the risks?

There is a lot of compliance, processes, etc. that you have to handle. There are dangers. In Thailand, a lot of foreign banks have not done well. Language and culture are an issue. These are the day-to-day challenges we try to overcome as we try to regionalise.

The scale of our operations in Thailand and Indonesia is very different. Thailand has a sharp growth trajectory from where we start but in terms of scale, it is still very much smaller. Whereas in Indonesia, we are the fifth largest bank with 650 branches.

What do you expect from your small stake in the bank in China?

Since we are taking the position as a leading Asean bank, we have to have exposure to China. We identified this bank with very high potential. We haven’t put in a lot of capital but we think the growth trajectory can be extremely sharp.

We have a small stake (in Yingkou Commercial Bank Co Ltd) but we are the single-largest shareholder. At 20%, we have management participation. Our guys have gone in. This bank has done very well in its city that so much so it is committed to becoming a regional bank.

From a city of two to three million people, it becomes a regional bank where we can serve a population of 42 million. The prospects are very exciting and strategically, there is a clear shift in China from the south to the north.

What are the pecularities you have found dealing with customers and experiences from different parts of the region?

The first lesson is don’t treat all the countries the same. I have saved so much consultancy fees by just using talents from other parts of the firm.

For instance, in the phase two transformation of the CIMB Bank branches, I realised that my Indonesian branches were far superior. So I imported 10 young men and women from Indonesia on a specific project to help me transform the CIMB Bank branches by a notch. They have done a wonderful job.

In terms of product development, there is demand in Indonesia for infrastructure funding. Which country has the experience of building a solid domestic currency bond market? It’s Malaysia. These are knowledge we have within the firm. There is reality in synergising across Asean borders.

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