CIMB switches to consolidation mode

Kuala Lumpur

CIMB Group Holdings, Malaysia's second-largest lender by assets, plans additional cost cuts after abandoning a three-way merger with major domestic competitors, before switching to focus on revenue growth next year.

The bank is seeking the cost reductions on top of the savings achieved by the recent closure of its Australian office and other job cuts in its investment bank, CIMB chief executive officer Tengku Zafrul Abdul Aziz said.

"This year is the recalibration year: getting the system right, building the loan growth, building the customer base," Tengku Zafrul said in an interview in Kuala Lumpur on Wednesday. "Next year is when you start to push the new ideas, because you can't just talk about reducing costs without increasing revenue."

CIMB was part of negotiations for a merger with domestic rivals RHB Capital and Malaysia Building Society. The companies aborted the plan in January, citing unfavourable economic conditions following the plunge in oil prices.

Tougher regulations and higher capital requirements are putting pressure on financial firms around the world, with Standard Chartered Plc, CLSA Ltd and Nomura Holdings Inc among those which have eliminated jobs in Asia.

CIMB's high cost structure relative to income has contributed to the underperformance of its shares relative to the benchmark FTSE Bursa Malaysia KLCI Index in the past few years, Tengku Zafrul said. The stock has fallen 20 per cent in the past year, compared with a 1.7 per cent decline in the broader market index.

Acquisitions over the years contributed to an increase in costs, while income growth hasn't caught up, he said.

"Year after year, we thought the revenue will come in," Tengku Zafrul said. "But now, the management and the board have taken the tough decision that, look, this could be the new normal. You can't wait for revenue to come in anymore."

Investors would like CIMB to diversify its earnings and reduce reliance on volatile capital market deals and on Indonesia, he said. Indonesia is CIMB's second-biggest market outside Malaysia, accounting for about a fifth of its total loans, according to data compiled by Bloomberg.

More bad debt provisions may be needed in Indonesia, even as the country's longer-term prospects remain positive, Tengku Zafrul said.

CIMB's cost-to-income ratio is 59.1 per cent, according to the bank. The lender is targeting a ratio of less than 50 per cent at the end of 2018 and for consumer banking to contribute about 60 per cent of income, the company said in February. It aims to achieve a return on equity of 15 per cent by then.

CIMB is no longer scouting for acquisitions, apart from in the Philippines where it is choosing between a possible purchase and applying for a banking licence, Tengku Zafrul said. In Vietnam, the group is optimistic that it would obtain a banking permit this year, he said.

The moves in the Philippines and Vietnam would give CIMB a presence in all the South-east Asian nations.

Net income dropped 81 per cent in the quarter through December from a year earlier, the bank reported in February, after the group made provisions for loan impairments in Indonesia and Malaysia. It is due to report first-quarter results by late May.

"We want to consolidate, strengthen the fundamentals, strengthen our core" over the next three years, Tengku Zafrul said. "We want to manage the firm better." Bloomberg