Tengku Zafrul's game plan


  • Banking
  • Saturday, 24 Jan 2015

Tengku Zafrul.

THE biggest nightmare for any banking chief executive is to go into a merger only to find the capital markets roiling into uncertainty and the real economy wobbling a few months down the road.

One person who probably can testify to this is Tan Sri Abdul Rashid Hussain, one of Malaysia’s brightest investment bankers who had helmed the merger of DCB Bank Bhd and Kwong Yik Bank in November 1996. That merger was the most expensive banking exercise transacted at a price-to-book value of 3.2 times. The merged entity became what is known today as the RHB banking group.

Six months later, the Asian financial crisis started to unfold. The economic climate did not help Rashid in executing the merger.

He had to manage the business and extract synergies from it, not to mention that Malaysia was going through a period of political upheaval.

With so many variables to the merger, it eventually cost Rashid the ownership of the bank he had founded.

Two decades on, amidst the decline in business activity following the sharp drop in oil prices, Tengku Datuk Zafrul Tengku Abdul Aziz (pic), the acting chief executive of CIMB Group Holdings Bhd, was faced with the tough decision of whether to pursue a three-way merger with RHB Capital Bhd and Malaysia Building Society Bhd (MBSB).

It was Tengku Zafrul’s first major decision since his ascent to helm CIMB last September. He finally decided that the merger, which would potentially have propelled the group to greater heights in terms of scale and size, be called off.

In relating his experience in going through the process, Tengku Zafrul describes it as a “baptism of fire”.

The 42-year-old Tengku Zafrul had joined CIMB in January last year as head of investment banking. He was chosen to succeed Datuk Seri Nazir Razak, who has assumed the role of chairman of the bank in a leadership transition that was completed last year.

On a more serious note, he says aborting the merger was a blessing in disguise. The markets have given their vote of approval, as evidenced by CIMB’s share price rising.

“If we had executed the merger only to face the current market volatility, it would have been a struggle to achieve the synergies and cost benefits planned,” Tengku Zafrul says in an interview with StarBizWeek.

Unlike CIMB’s Southern Bank acquisition in 2006 that was a complementary fit, a merger with RHB would have had significant duplications that would have required a tremendous amount of energy and time to ensure synergies are derived, notes an analyst.

Recall the proposed merger involving CIMB, RHB Cap and MBSB was premised on cost synergies with potential cost savings to make up 86% of total synergies.

Many had commented that the deal was an ambitious one to begin with, involving a complex integration process.

On whether there was political interference, given that the merger would have meant job cuts, he says it was “purely a business decision”.

The turn of events could also spell the end of any courtship between CIMB and RHB Cap for the medium term at least. The two banking entities had flirted with the idea of a merger twice previously before the aborted third attempt.

“In business, you can never say never, but we do not foresee any major mergers and acquisitions for the foreseeable future. RHB/MBSB was a unique opportunity because we were merging for scale and also entering a new space of micro-finance with a strategic partner,” Tengku Zafrul says. Under the proposed RM44.7bil merger, RHB Cap was to issue one share for every 1.38 CIMB shares, translating into a price-to-book value ratio of 1.7 times and 1.44 times for CIMB and RHB Cap, respectively.

Their combined assets of RM613.7bil would have upstaged rival Malayan Banking Bhd (Maybank), which has RM578bil in total assets.

CIMB, which is 29.3%-controlled by Khazanah Nasional Bhd, is the country’s second-largest bank by asset size, with some RM380bil in assets, ahead of Public Bank Bhd, which holds RM312bil in total assets.

The T18 strategy

With the merger off the table, CIMB is taking an introspective approach to addressing a core issue bogging the bank down – cost. “Cost is our biggest problem,” admits Tengku Zafrul, adding that the focus now is to rationalise a group that has grown significantly through acquisitions, but where the handle on cost has a lot of room for improvement.

“We are in the midst of charting a mid-term strategy dubbed T18, essentially our road map and goals towards 2018. And cost is a big agenda of it.”

Tengku Zafrul declines to elaborate, but hints that there will be “brave” decisions made by CIMB in the next few months. “This means growing in some areas and exiting others, revamping our organisation structures across the group.”

CIMB is expected to unveil details of T18 some time in the middle of next month.

CIMB’s cost-to-income ratio – a measure of how tight a ship the bank runs - was among the highest at 57.6% for financial year 2013 (FY13). It had previously set a target of 50% by 2015, to be driven by strong income growth and improved cost efficiency, but this target may not be feasible, given that income is not expected to grow fast enough to cover costs due to the slowing economy.

Enter, T18, a big part of which is to reduce costs - something that is within the control of the bank’s management.

The bank with the lowest cost-to-income ratio is Public Bank at 30.7% based on its numbers for FY13. Interestingly, MBSB’s cost-to-income ratio is the lowest at 21%.

Across the causeway, Singapore’s DBS Group Holdings and Oversea-Chinese Banking Corp had a cost-to-income ratio of 44% and 42%, respectively, as of FY13.

CIMB’s acquisition of the Royal Bank of Scotland‘s (RBS) business in Asia-Pacific in 2012 has been cited as a reason for the ballooning of its operating costs. Analysts reckon that a restructuring of this investment banking platform could be part of T18.

“CIMB’s ambitions to expand beyond Asean with the RBS acquisition gave it a presence in 17 countries, including Australia ... but this came with a price,” notes an analyst.

While the acquisition of RBS has given it a presence in these countries, CIMB has yet to make strong inroads into the Asia-Pacific market. “The market is competitive, dominated by global banks, where CIMB is seen as a relatively new player,” says Tengku Zafrul.

Expansion into the SME sector

According to Tengku Zafrul, among the goals being set as part of T18 is a focus on banking services tailored to the less sexy-but-stable businesses such as the small and medium-sized enterprises (SME) market.

To be sure, this is a highly competitive segment with rivals Public Bank and Alliance Bank Bhd already entrenched there. CIMB currently has about 7% of the SME market.

Still, it is better late than never for CIMB to refocus its strengths on profitable segments.

Some analysts are bullish that CIMB can gain market share in the SME market, for example, if it uses its strengths deftly. One possibility is to leverage on the group’s strengths such as investment banking. Notes an industry observer:

“CIMB could start attracting business from SMEs which have listing ambitions, with assurances from the group that it would provide it with useful guidance and fee structures for the eventual flotation.”

The analysts also expect CIMB to undertake “spring cleaning” in the fourth quarter of FY14 to end-December (Q4’14). UOB KayHian in a report notes that its Q4’14 results are likely to reflect a significant spike in provisions, mainly from Indonesian subsidiary, PT Bank CIMB Niaga Tbk.

CIMB’s third-quarter profit fell 16% to RM890mil, hurt by higher loan impairments in Indonesia.


This spring cleaning is expected to flow through in Q1’15, but the amount is expected to be lower than Q4’14, indicating that this year would be better, albeit a muted one.

Analysts reckon the spring cleaning would involve additional pre-emptive provision buffers that will raise the loan-loss coverage ratio to above 80%. The bank’s loan-loss cover stood at 74% as at September last year.

“Note that Q3’14’s return on equity (ROE) of 9.8% was lower than management’s initial full-year target of 13.5%, and with further weakness in Q4’14 and Q1’15, we expect a downward revision in 2015’s ROE target closer to the 11% level,” UOB KayHian says.

In view of the expected hike in the Q4’14 provision, UOB KayHian has trimmed 2014 earnings by 3.4%, while the 2015 forecast is unchanged at 5.6% below consensus.

In FY13, CIMB reported a net profit of RM4.54bil. Consumer banking contributed the bulk at 44%, followed by corporate banking at 25% and treasury and markets, 20%.

But valuation-wise, the stock is currently trading at the 2015 price-to-book value of 1.23 times, which implies that the market is pricing in ROE expectations on a bullish side of about 11.3% ahead. The stock closed at RM5.50 yesterday.

Sentiment on the stock seems neutral, with 10 “hold” calls, seven “buys” and six “sell” calls based on Bloomberg data.

Interestingly, after the merger was called off, there was euphoria on CIMB, indicating that the bank was probably giving away more than what the market had expected in the aborted corporate exercise.

What it does in the next few months and how it executes the T18 plan will determine where it goes a year from now.

For Tengku Zafrul, the merger is over, but his real journey in CIMB has just begun.

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