CEO sets ROE target of 13% to be achieved in two years

“THE outlook is as gloomy as the heavy rain and thick clouds outside,” quips RHB Capital Bhd (RHB Cap) group managing director Datuk Khairussaleh Ramli, drawing the weather analogy to the challenging role ahead for him as we settle down for this interview.

In anticipation of a softer banking environment compared with last year, Khairussaleh who assumed the position as head honcho of the country’s fourth largest bank in May is wasting no time in taking the bull by its horns and has already mapped out a growth strategy many have described as “ambitious”.

However, the emphasis will be more on value creation and not so much on size as in his own words “size does not matter”.

“While we have grown in asset size, we think it’s time to focus more on value creation to shareholders.

“And when we talk about value creation, it is also about how we want to anchor it on return on equity (ROE) where we have a target to reach 13% in 2017 and 15% in 2020,” says Khairussaleh.

With the seasoned banker having taken over the helm four months ago, it is a fresh beginning of sorts for the entire banking group.

“As CEO the buck stops with me,” he says with a laugh.

RHB Cap’s asset size has expanded from RM115bil in 2009 to RM223bil in June – almost two-fold over a six-year period.

Last year, the banking group crossed the RM2bil profit mark – the best it has achieved so far.

And while it has always been seen as a takeover target as in the recent proposed but later aborted three-way merger with CIMB Group Holdings Bhd and Malaysia Building Society Bhd which, observers say it may not be long before it becomes too expensive to be a target of takeovers.

The key lies with the successful implementation of its strategy called IGNITE 2017.

Two weeks ago, Khairussaleh received the approval of the board for his reframed IGNITE 2017 strategy to guide the group through the next five years with the first target of hitting ROE of 13% by 2017.

RHB Cap’s original IGNITE 2017 strategy had 36 initiatives but now has been reduced to 17 for more focus.

“If RHB achieves a ROE of 13% and manages to rationalise its manpower, it would become too expensive to be taken over,” notes a banker.

ROE targets

Under the fresh reframed strategy, RHB Cap wants to boost revenue from key growth areas, manage cost and enhance productivity and lastly, optimise its capital and balance sheet.

Towards this end, one of the initiatives announced last week was a career transition scheme (CTS) to trim its workforce.

The group has some 17,500 employees, with around 14,000 in Malaysia and the rest spread across the region.

The management has not set a target number of employees that it wants reduced.

Khairussaleh says that it does not have any targets because it does not know the response the exercise will receive.

“But we did scenarios for board approval purposes, our scheme is voluntary in nature.

“Things have been changing so fast much so after doing all this (making changes), there is a gap between our manpower level and business requirements, so how do we address this gap?”

That’s the reason the company is implementing this CTS, according to Khairussaleh.

“If the number is huge all can’t be released at one go... the company will need to have staggered release points,” Khairussaleh says.

“To us, it has to be fair to both, the company and the employees and we think that it is a fairly good package. We are also giving training in terms of career transition.”

RHB Cap launched the scheme last week and is giving employees the opportunity to respond within three weeks.

An exercise to trim its cost is something that RHB has to do if it wants to achieve better ROE.

Its cost-to-income ratio (CIR) – a measure of how tight a ship is run – at 55.5% is on the high side, say analysts. CIMB Research notes that the group has missed its CIR target of less than 51% .

But the manner in which how RHB became a force in the banking scene helps explain why its CIR is high.

Recall, RHB Cap is the result of an amalgamation of Kwong Yik Bank Bhd, DCB Bank Bhd, Sime Bank Bhd and Utama Banking Group (UBG) and since 1997 had been driven by Tan Sri Rashid Hussain, the founder of the bank.

Rashid emerged as the group’s executive chairman but could not hold on for long due to a combination of factors related to markets and the political scene then.

The UBG group took over from Rashid in 2002. They were in control for less than four years before the Employees Provident Fund (EPF) took control in 2007 after a bitter corporate battle and ended up with a 82 stake%.

In 2008, EPF sold a 25% stake to Abu Dhabi Commercial Bank, which later sold that stake to Aabar Investments PJSC, valuing the stock at a hefty 2.25 times its book value then.

Currently, EPF has a 41.6% stake in RHB Cap, followed by Aabar with 21.09% and OSK Holdings Bhd 9.9%, according to Bloomberg.

It is no secret that RHB Cap’s major shareholders have different expectations, say industry observers.

On one end is the EPF with a long-term view of things. On the other end, OSK, a fairly new shareholder following a merger with its investment banking arm less than three years ago, is seen as aggressive and wants results. Aabar, meanwhile, is viewed as a short-term shareholder with its block supposedly up for sale.

Recall that RHB Cap was also at the centre of a takeover attempt by Malayan Banking Bhd and CIMB in 2011. However, the deal fell through because Aabar wanted a higher valuation.

Reframing the strategy

“If you remember our earlier strategy, one of the five pillars included us wanting to be a multinational financial services group and to be top three in Malaysia and top eight in Asean in terms of size and performance,“

But because the group wants to focus more on value creation now, it has dropped the size goal, focusing more on performance.

The second pillar was about its contribution from overseas.

Originally, the group had identified as much as 40% of its revenue to come from overseas, premised on the strategy that it would be able to acquire a commercial bank in Indonesia.

“But we did not continue with that transaction, so now we are being more realistic with a target of 20% of our profits coming from overseas by 2020.

“When we talk about value creation, we want to anchor our journey into three core themes,” says Khairussalleh.

Under the fresh reframed strategy, RHB Cap wants to boost revenue from key growth areas, manage cost and enhance productivity and lastly, optimise its capital and balance sheet.

Among the growth areas, Khairussaleh points out that the small and medium enterprise (SME) segment is one of the fastest growing areas which offer much potential for growth.

Over the past two years, the group has grown its market share in the SME segment from 6% to 8%.

It has launched an SME e-retail solution, basically bundling what it has in terms of merchants, cards and cash management, to enable the SMEs to wholly manage their businesses.

“From a growth point of view, we have to be picky on segments to grow, to manage our asset liability in a more effective and efficient way particularly for our foreign assets and liabilities.”

In the medium and long-term strategy there are two parts for the banking group.

“One is the corporate restructuring which entails a few things. Under this, first is a rights issue of RM2.5bil where this money will be injected into RHB Bank Bhd for the bank to use that capital to grow.

“Then there is the internal restructuring where the insurance business will be injected into the bank. The bank will then assume the group’s listing status and become the new holding company for RHB group.”

Khairussaleh says the shares in the bank would then be distributed to its current capital shareholders through capital repayment and distribution.

“We will list RHB Bank and wind up the holding company. We hope to finalise this by January next year.”

In April, RHB Cap had announced that it would embark on this corporate exercise to strengthen its capital structure, improve tax efficiency and support future growth after the three-way mega-merger proposal fell through.

“Traditionally RHB has always been trading at a discount – this is beyond management’s control but with the restructuring we hope to narrow the discount.”

In the latest development of its rights issue, Aabar has not committed to its portion meaning that the Abu Dhabi fund’s stake would be diluted following the exercise.

Estimates show that the fund will end up holding 17.5% after the rights issue.

With a block of less than 20% and not opting for RHB Cap’s dividend reinvestment plan, Aabar will be diluted over time. Combine this with RHB hitting a ROE of 13%, the banking group will certainly not be viewed as a takeover target.

Related Stories:

Khairussaleh gets to work to see bank through a soft landscape

Rights option still open for Aabar

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