Group’s profits and cost-to-income ratio improves on T18 programme
WITH just one year to go for CIMB Group Holdings Bhd ’s T18 programme, which seeks to strengthen the foundation of the banking group, the results of the sweeping revamp strategy are working.
The group’s profits are up and its cost-to-income ratio, which measures the productivity of the business, has improved. Those two headline targets, along with its desired common equity tier-1 or CET1 capital targets of 12% and diversity of income from its consumer and commercial operations, seem to be on track to hit their targets by the end of the year.
Achieving those targets was never easy. Changes to the marketplace and competition from banks and non-banks meant constant tweaks had to be made to its operations to reach the goals it has set for itself by the end of the year.
One such example, group chief executive officer Tengku Datuk Seri Zafrul Aziz points out, was the realisation that improving its customer experience after its T18 programme had kicked off was essential.
“Initially, we did not have customer experience as one of our programmes, but two years ago, we realised that it was important. We started our customer experience department two years ago, and last year, we launched the 5Cs – cost, capital, customer experience, compliance and culture,” he says.
Tengku Zafrul says part of the problem has been that banks, when they grow big, tend to think they know best. There is now a need to recognise the limitations on resources and tackle margin compression from the competition.
“We have been working with partners and you will see more of this when banks move into a new era,” he says.
Banks need customers to see them as more than a provider of loans, he says, as to how CIMB would need to adapt to a changing banking world.
“For example, we need to be up there infront and work with property companies. The Lazada partnership is not about just the customers, but also about us partnering with the suppliers. We want to finance the SME companies that offer products on that platform and facilitate the whole supply chain,” he says.
Part of the fluid nature of such programmes is how the business of banking has changed. Regulatory requirements for more capital and changes to accounting rules mean that more focus has to be placed on the core operations of the group, and the offshoots of the banking business have to be trimmed.
Furthermore, the onset of competition from non-banking groups and giants in industry such as Alibaba, Google and other tech-centric companies means that the way banks interact with their customers is changing.
The digitisation of business throughout the world has led to major disruptions in traditional industries. The ripples of what technology has done to other businesses have now touched the banking industry, where the Internet has brought about competition from fintech (financial technology) companies that are small but nimble. And the challenge they pose has put banks on alert. However, CIMB, like most other banking groups, realises that there is no template as to what to do in combating the risks to their business posed by fintech companies, both large and small.
Payment gateways from the likes of Alipay and WeChat Wallet have seen the disintermediation role between customers and merchants no longer constricted to the domain of credit card companies and banks. And banks like CIMB have started to take notice.
“To get to where we want to be, we have to not only compete with the traditional banks, but also the non-banks and newcomers. I think the main reason for the success of some of the fintech companies is because banks over time have learnt to understand the consumer less,” he says.
“They (fintech companies) are able to understand the customer better. Maybe the banks have taken things for granted and are preoccupied with how to do things instead of what the customers want.”
The next growth plan
CIMB routinely looks at the different components of its business, and over the years, has changed the way it operates. It streamlined its insurance business to concentrate on distributing such products.
Where stockbroking is concerned, the evolution of the business has led to a fall in margins, and the increase in technological investments led to questions about the future profitability of the business.
Partnering China Galaxy Securities Co Ltd, which deals with immense daily trading volumes through an Internet platform, will allow CIMB to open up to new markets.
As for the sale of a 20% stake in its asset-management business to existing partner Principal Group, CIMB believes the deal will strengthen its financials while allowing it the flexibility to still be involved in the business.
Such changes are common as banks start to modify the way they do business. And it is no secret that banks will have to up their game in a fast-changing digital world, and that is where things will start for CIMB when it unveils its next growth strategy before the end of this year. Work on the new plan, which covers the duration between 2019 and 2023, has already begun and based on the ideas that are formulated, they will touch on three broad areas.
The first is technology and the digital world.
“Banking is not just about giving loans and taking deposits. It must be part of a lifestyle where we can support an individual to do many other things, in the ease of how they do business and also in their personal lives,” he says.
“We are still debating where we will come into that role because at different chains, there will be different margins. We can be the balance sheet provider because we have a big balance sheet and a good deposit base, but that is the worst in terms of margins today.”
The basic business of lending money and taking deposits is where cut-throat competition exists from competing banks. Analysts have pointed towards the margin compression in such basic banking, but the flipside is that the volume of such business is tremendous and growing.
The brick-and-mortar part of the business will continue to grow and CIMB will strengthen the bank’s capital, improve on compliance cost and enhance its customer experience.
But there is also a digitisation element to its business that needs to take place to improve on margins.
To that end, CIMB is now working with fintech companies to innovate its product and service offerings. It has also opened up its network and made available its source code to its digital infrastructure to external developers.
“Banks must open their networks and we are also opening our APIs (application programming interface) so people can develop software solutions with us. We are working with two companies now, one of which is on the artificial intelligence (AI) side for wealth management so that they come in and tap in by opening our gates,” says Tengku Zafrul.
He says CIMB will come up with the targets and the journey for its next phase of growth and the market needs to understand one thing. “We need to make investments. Look at the technology companies in the financial space. They make huge investments and investors have to understand that we need to make these investments but commit to certain returns,” he says.
“That will be like a J-curve. Shareholders must have the stomach to see these investments being made. If we don’t make these investments in the next three to five years, I don’t think we will be able to compete in the next five to 10 years.”
The cost of upgrading its technology infrastructure is expected to be less than before, but with the tech cycle getting shorter, and with new investments needed for AI, these investments may happen more frequently than before.
Investments in tech and the digitisation of the banking business is also expected to reduce costs and improve productivity even further by the end of the next mid-term growth plan. Should AI be used increasingly in the interface with customers in higher-margin services, that could also increase profitability per employee.
Digitising the regional space
As technology will start to feature more prominently in the business of CIMB over the next five years, the digital bank concept it is rolling out in its operations in Vietnam and later the Philippines will have a huge say in the future of its banking franchise in Malaysia and the region.
“Whatever we developed in Vietnam, the moment we see this trend changing, at least we can adapt it to other countries,” he says.
Having a digital branch helps with maintaining scale when it comes to branches in the country. CIMB has ideas on how it can monetise its physical branch network and that will help, as its regional exposure is large, given its presence in Asean countries.
At the moment, 31% of CIMB’s pre-tax profit comes from outside Malaysia, with the largest contributor being Indonesia. It organically grew its network in Vietnam and the Philippines and this is where the experience it will learn from operating a digital bank will come in useful to the group.
“Our thesis is that the Asean demographic is going to grow. So, we want to be part of that,” he says.
“But we have to look at the long term and the use of technology is one way to strengthen our presence.”