The banner on CIMB’s website is a collage of 10 faces in different traditional dress from around the Association of Southeast Asian Nations (Asean) region. It reads, in huge letters, “Asean for you.”
Talk to the bank’s chief executive officer (CEO), Nazir Razak, and it’s apparent that this is not just an empty advertising slogan; it cuts to the heart of his view of the institution he runs.
“I think today more and more corporates have an interest in Asean,” he tells Asiamoney. “They want to do business in Asean and increasingly no one’s going to ignore Asean.”
CIMB has been an aggressive acquirer in Southeast Asia in recent years, largely because of Razak’s belief in the financial potential offered by promised closer integration between Asean nations.
Take its most recent acquisitions. Less than two months ago CIMB bought what was the Australian and Southeast Asian fixed income investment banking operations of Royal Bank of Scotland (RBS) for £179 million (US$271.5 million). In mid-May it announced the acquisition of 60% of Philippine lender Bank of Commerce (BoC) for PHP12.2 billion (US$279.4 million).
These acquisitions are part of Razak’s belief in the potential of the formation of the Asean economic community in 2015, a now nine-year-old objective.
Yet details on what the economic bloc may look like remain thin. Many doubt the ability of policymakers to bridge the numerous gaps in time and achieve something of substance.
But Razak thinks CIMB’s strength across Asean will create a key leverage point for his bank in other Asian markets. His goal: to become the leading corporate and investment bank across Asean in time for the region’s economic integration in 2015.
But CIMB is not the only bank with such growth plans. Singaporean lenders DBS and OCBC are competitive in Asean too, and are making acquisitions.
And domestic competitors such as RHB Capital and Maybank have been gaining ground on CIMB in Malaysia through their own acquisitions. The market is becoming more competitive as margins in some businesses drop and capital costs increase along with regulatory pressure.
Razak has CIMB’s groundwork in place, but the next few years will reveal how sound his rationale truly is.
A history of growth
CIMB was born in 1986 when Pertanian Baring Sanwa Multinational was renamed Commerce International Merchant Bankers, under the control of Bank of Commerce, which in 1991 became Commerce-Asset Holdings (CAHB) following a merger.
CAHB emerged from the Asian financial crisis of 1998 in control of the merged Bumiputra-Commerce Bank, and in 2006 the entities under it were consolidated under the CIMB umbrella.
Other acquisitions have followed. CIMB purchased Indonesia’s Bank Niaga in 2002, and brokerage GK Goh Holdings in 2005. It then merged CIMB Niaga with Bank Lippo in 2008 and completed its purchase of Bank Thai in 2009, which it expanded with the purchase of Bangkok-based Sicco Securities last year.
In addition, CIMB has a 19.99% stake in China’s Bank of Yingkou. Razak says its growth depends on what the Chinese authorities allow CIMB to do but there don’t seem to be any plans to integrate the joint venture further with CIMB’s operations elsewhere, or to expand it.
Added to these have been the most recent purchases of the RBS banking assets, and CIMB’s entry into the Philippines via its new stake in BoC.
The group’s profits are healthy. It announced record net profits for 2011 of MYR4.03 billion (US$1.28 billion), representing 15.1% year-on-year growth. Its most recent earnings report for first-quarter 2012 showed similar growth. Net profit was up 10.3% year on year to MYR1.01 billion and revenue up 18.4% to MYR3.25 billion.
Razak is the force behind most of CIMB’s regional expansion. The brother of Malaysia’s prime minister Najib Razak, he became CEO of the investment bank in 1999 and of the group in 2006.
“Nazir Razak is quite well respected within the industry…and he runs a pretty tight ship,” says a Malaysia banks analyst. “He’s not afraid to stop and take stock of the situation and if there’s a need to pull back on operations, he’ll pull back.”
Buying bits of RBS
Even given CIMB’s acquisitive track record, market observers were surprised when news broke of its interest in acquiring a chunk of RBS’s Asia Pacific investment banking businesses.
After weeks of speculation, CIMB bought RBS’s cash equities, equity capital markets (ECM) and mergers & acquisitions (M&A) businesses in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore, Taiwan and Thailand. In one step it bolstered CIMB’s investment banking capabilities across South-east Asia.
Asian acquisitions of international banking assets are not unknown – Nomura’s purchase of the collapsing Lehman Brothers’ Asia operations is one example – but they are rare, and replete with cultural conflicts.
Razak admits he had initial concerns when pitched the acquisition.
“Frankly when I was first shown this [RBS] deal I thought it was audacious and practically chased some people out of the room for suggesting it,” he tells Asiamoney. “But as time went by we rationalised it and saw it first as a good opportunity to complete our ex-Asean platform, which we have been building up gradually. Actually, it had been very painful trying to do it slowly.”
The RBS assets fit well with Razak’s broader goal to improve the bank’s Southeast Asia investment banking capabilities.
“We had a very dominant position in Malaysia …beyond Malaysia, we were making progress but it was a little bit of a struggle,” he says. “Many customers continued to perceive us as foreign, in Thailand and Indonesia.
“As such we tended to be placed not in the pot of local players but in the pot of global players. And when in that pot, our credentials look much weaker. With RBS I solve the credentials problem, after that it is the substance of what we can do versus the others.”
Razak’s plan is to combine the deal-making experience and international connections of the RBS bankers with CIMB’s Asean network and knowhow to pitch cross-border deals.
Analysts Asiamoney spoke to back the RBS acquisition as a relatively cheap way for CIMB to gain a foothold and boost distribution in several markets. But they note that personnel integration will be a challenge.
“That acquisition is more of a distribution platform for CIMB going forward,” says Clare Chin, Malaysia head of research at CLSA. “[CIMB] bought this loss-making entity but what you’re trying to buy here is expertise, maybe connections and an Asia-wide distribution platform.
“I don’t think it deviates very much from what they plan to be: a regional champion that is more skewed toward the investment-banking side.”
Unlike Nomura, which saw some of the senior bankers it acquired from Lehman Brothers abscond as soon as their bonus guarantees came due, the RBS bankers CIMB has gained are more likely to stay, not least because of the dearth of market opportunities and the stability the Malaysian bank offers.
“There’s just not that much else available on the street right now,” says a Hong Kong-based headhunter. “We received CVs from RBS bankers but even many of those that got offers decided it was better to maintain their client networks at CIMB instead.”
Strength in depth
Razak believes there is a particularly good reason to expand now: retrenchment at global banks.
“You’re going to see a retreat of some globals, a reduction in the number of people who prefer global relationships and the strengthening of the position of regional players,” Razak predicts. “With that kind of mindset, when this RBS opportunity came, we said: ‘If we believe this, maybe this is the way we step up and be one of those regional franchises.”
He believes that as global banks pull back, regional businesses like CIMB will get more cross-border transactions. And that should help them win domestic mandates too.
“The most obvious product to sell is cross-border into Asean but once you build relationships you will also want to have a go at doing onshore business,” says Razak.
Razak’s bet on cross-border business should pay off if regional integration does bear fruit. But there isn’t much of this business right now, which makes plugging into Southeast Asia’s domestic capital markets important.
The region registered US$79.9 billion in combined foreign investment last year, compared to US$105.7 billion into China and US$24.6 billion into India. And 48.6% of the Asean-targeted flows went to Singapore, due to the city-state’s positioning as a destination for offshore finance.
Meanwhile Asean’s local-currency markets registered US$10.66 billion in foreign issuance last year – but again almost half went to Singapore, with the rest split between Indonesia, Malaysia and Thailand.
Singapore is the only country able to regularly attract foreign ECM listings too. It accounted for all of the US$6.9 billion of Southeast Asia ECM volume from issuers outside the region last year, according to Dealogic.
While CIMB does not yet have a dominant position outside Malaysia, its efforts have been bearing fruit. It failed to make the top 10 in South-east Asian debt advisory and M&A last year but was number one in ECM. It remains there year to date.
It also ranked ninth in ECM in Indonesia last year and fifth in Thailand, cracking the top 10 for debt in the latter and ranking ninth for M&A in Indonesia.
Razak may have made his reputation as an investment banker, but given the limitations of the region’s capital markets he understands that CIMB also needs to be a successful corporate bank.
The focus is ironic, given CIMB’s current income streams. Consumer banking contributed MYR530 million (US$165.6 million) of CIMB’s group profits before tax; 40% of the total. Corporate banking, investment banking and markets combined contributed 47%, with the final 3% comprising investments.
But observers believe that Razak’s targeting of smaller-scale acquisitions without major branch networks in markets outside Malaysia indicates a greater focus on corporate and investment banking versus retail.
“It looks as if CIMB is going to be more corporate banking-focused because it is one of the largest corporate banks in Malaysia and has the network,” says the Malaysia banks analyst. “Even CIMB Niaga is positioned as a corporate bank more than a retail bank so I guess that’s where its niche is, and with the investment banking licences that it has, it complements the corporate side of its business.”
“If you don’t have the size, there’s no point talking about retail banking,” he says. “In any country, the retail banking side is dominated by the incumbents so it’s not easy to enter the market.”
The bank’s most recent acquisition of BoC in the Philippines offers a snapshot of Razak’s strategy. The bank is only the Philippines’ 16th-largest by bank assets, but it gives CIMB an onshore platform and the capability to do corporate as well as retail banking.
“At the moment in terms of size it looks like a call option on the Philippines,” admits Razak. “But it would be premature to say that we would have to buy again to get scale. The first step is to get the management team and then build a business plan.”
Nevertheless, observers think that it could be the start of further acquisitions in the country. “Eventually there will be the need for bigger deals [in the Philippines] but I think it’s important to get a foothold first,” says the banks analyst.
Don’t expect any additional M&A by CIMB for now though; Razak says he is not planning any more big acquisitions in the region. Analysts don’t think he needs to, and they like Razak’s stated business model of buying smaller, integrating well and building a platform.
“[CIMB] has managed to turn around investments made and extracted good value, for example Niaga and Bank Thai,” says Simon Chen, the analyst covering CIMB for Moody’s. “[The regional strategy] makes sense because the margins in Malaysia have been shrinking, and competition in Malaysia is getting fiercer.”
In a May 14 report, Moody’s noted that CIMB’s BoC acquisition was credit positive and it supports the expansion strategy, though Chen is concerned about the income volatility of investment banking as an increasing focus for the bank.
CIMB’s business goals seem sensible, but it is not alone: domestic rival Maybank plus Singaporean behemoths DBS and OCBC harbour similar pan-regional ambitions.
“Once you’re trying to build yourself up to be a regional champion, which is what Maybank and CIMB are doing, you come up against OCBC and DBS,” says Chin at CLSA.
Singapore’s DBS, OCBC and Maybank are all bigger than CIMB by assets and both DBS and Maybank have made larger recent acquisitions.
DBS, Asean’s largest bank by assets, signalled its intent to expand in Indonesia when it announced the IDR66.4 trillion (US$7 billion) acquisition of Jakarta-headquartered Bank Danamon on the same day as CIMB’s agreement with RBS.
And Maybank spent SGD798.44 million (US$620.5 million) to buy a 44.6% stake in Singapore-based brokerage Kim Eng Securities on May 10 last year, bringing its stake to 50.2% – a level it has since raised to 92.47%.
“I like this concept of buying into the investment-banking platforms in the region, which the Singapore banks have not done, so I would favour the Malaysian way of doing it,” says the banks analyst. “Having this investment-banking platform allows them to create a more diverse source of income.”
But the similarity of Maybank’s efforts to CIMB means the two are likely to compete even more. Yet Razak claims not to be worried about its plans, and is particularly sanguine about the potentially greater threat of wealthy DBS.
“I welcome DBS back to Asean, as it were. I see it, first and foremost, as further vindication of our strategy to focus on the Asean market,” he says. “When you are on to a good thing, you have to expect more competitors, bigger competitors, to follow you. You just have to raise your game when they do.”
Razak has reason for this seemingly nonchalant attitude towards the competition: CIMB’s proven capital-markets prowess versus its larger rivals.
Neither Maybank nor DBS participated in nearly as many investment banking deals in Asean – outside their respective home markets – last year as CIMB. And the latter already earns 40% of its revenue outside its home market, and aims to crank that up to 60% by 2015.
Indonesia, Asean’s biggest economy, is a big part of these diversification plans.
“Indonesia is 30% of our profits today; we think [it] can become 40%,” says Razak. “By 2015 we may be more Indonesian than Malaysian based on the present trajectory, if nobody forces us to sell anything.”
The latter point refers to Bank Indonesia’s (BI) widely expected decision to drop the foreign ownership cap for local banks from 99%. Such a move would force CIMB to sell down its stake in CIMB Niaga, and it would threaten DBS’s takeover of Danamon.
“The biggest question these days is what’s going to happen with regulation in Indonesia because they may be required to sell down some of their stake in CIMB Niaga,” says CLSA’s Chin.
Indonesia’s currently lax foreign ownership rules are out of step with more protectionist laws elsewhere. Malaysia allows only 30% foreign ownership. Vietnam allows 30% but only 20% of that can be a single entity. The Philippines allows 60%.
The Indonesian central bank is reportedly looking to lower the cap because it is frustrated by the reluctance of the Monetary Authority of Singapore (MAS) to open up reciprocal access for Indonesian lenders in the city-state.
Such regulatory uncertainty could crimp CIMB’s regional plans. Again Razak is an optimist, arguing that economic integration within Asean eventually will force such rules to relax.
“As [the Asean Economic Community of] 2015 draws nearer, we will see a rise in economic nationalism but I hope that our political leaders stay the course, as they have in this instance, because integration is absolutely critical to Asean’s future,” he predicts.
Asean’s aim is to forge closer political ties, boost regional security and increase economic integration.
To achieve the latter the group wants to create a single regional economic market by 2015, known as the Asean Economic Community. This would require the removal of trade barriers, a rise in cross-investment and integrated capital markets.
CIMB’s regional growth and investment banking focus means it has a great deal to gain from an integrated economic community. But Razak acknowledges that an imperfect economic union would crimp his group’s potential – something that he feels is quite likely.
“We do think that Asean’s current ‘to do’ list for 2015 is too ambitious,” he says. “But as the economies integrate, CIMB is very well positioned to benefit from uplifts in cross-border flows of trade, investment and people.
“If [Asean] integration does happen, we will be more ready than most. CIMB is the only firm that has consistent branch branding from Chiang Rai in Northern Thailand all the way down to Bali,” he says. “Of course, there is a flip side in that if anything goes wrong with Asean, as a brand we will take a hit too.”
There have been signs of progress towards this integration. In February the central banks of Malaysia and Thailand agreed to establish a cross-border repurchase agreement that will boost the ability of banks on both sides of the border to access ringgit and baht funding. CIMB, with its sizeable operations in Thailand, stands to benefit, according to a February 11 Moody’s report.
The bank’s traders must also be keenly anticipating the Asean trading link being launched this month (June). Not yet operational at press time, it will create an integrated Asean capital market across stock exchanges in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam with a total market capitalisation of US$1.8 trillion.
Yet there has been a definitive lack of concrete objectives set for an Asean economic integration that is now only three years away. With the eurozone crisis still raging, the chances of the integration proceeding on time look slim.
Is this a worry for Razak, who has put such stock in it going ahead? Ever the optimist he claims not, arguing that global interest in the region should grow even if the deadline is missed.
Yet delays in such links would almost inevitably disappoint, given the effort he has taken to build a bank that can benefit from greater regional ties.
CIMB is one of Malaysia’s most notable international success stories, in no small part because of Razak’s drive and vision. And it looks set to continue doing well, buoyed by a good reputation for integrating acquired assets.
But to reach its full potential, the bank needs Asean’s disparate policymakers to hammer out economic agreement. Razak, and CIMB’s shareholders, had better not hold their breath.