Reuters – Nazir Razak, the chief executive of Malaysian bank CIMB, says his country is “at a crossroads” ahead of elections that his brother, the prime minister, must call within weeks. The same can be said of his bank.
A $3.7 billion (RM11.47 billion) Asia expansion by CIMB, aiming where others have failed to build a regional powerhouse by tapping fast-growing markets, is running into stiff headwinds from competition, rising costs and capital constraints.
Southeast Asia’s fifth-largest bank affirmed its pan-Asian ambitions last year when it acquired the equity and corporate finance businesses in the region of Royal Bank of Scotland Group Plc.
The combined operation is in its early days, but shareholders are getting impatient. CIMB stock, after climbing through much of last year, has pulled back in the wake of the $140 million deal and lost more than 20 percent since July 2011.
The majority state-owned bank also faces struggles at home and investor concerns over a failure in the past two years to deliver on the 18 to 20 percent return on equity (ROE) that the market had come to expect.
Nazir, 46, acknowledged in an interview with Reuters early this month the challenges that face Malaysia’s No. 2 bank to make a profitable success of its forays beyond established footholds in Malaysia, seeing “limited scope for ROE expansion in the near term given the pressure on margins and higher overheads particularly, from the RBS acquisition”.
The deal added less than 1 percent to CIMB’s 45,000-strong workforce, but they were relatively high-wage positions. The RBS tie-up is already paying off, Nazir said.
“I see deals today – what we’ve won and will execute this year – that we would not have won as individual franchises,” he told Reuters, citing the $416 million IPO of India’s Religare Health Trust as an example.
Doubts like those at UBS notwithstanding, Nazir’s regional strategy, which aims to reap 60 percent of net profit overseas by 2015 compared with 43 percent now, still has widespread backing from investors.
“Without him CIMB would have remained a very domestic-focused, pure investment bank,” said Christopher Wong, senior investment manager at Aberdeen Asset Management Asia Ltd, one of the top 10 investors in CIMB.
“The jury is still out on some of the acquisitions, but even local competitors are trying to replicate this model.”
With a Malaysian election due by April, the country’s political winds are inevitably a topic for a CEO with family ties to the leadership. His father also once served as prime minister.
But Nazir, whose career at CIMB spans more than two decades, says the bank has steered clear of politics. He rejects the idea that a change in government would threaten its interests, or that his brother Najib Razak’s position as finance minister and prime minister presents a potential conflict of interest.
“At the end of the day, whoever is in government will not want to do anything to undermine what is a very valuable investment for the Malaysian government,” he said.
Politics aside, CIMB faces challenges on its home turf from heightened competition. Maybank, the country’s biggest bank, has gained at CIMB’s expense in some areas of consumer and commercial banking, as it more aggressively chases a boom in consumer debt. CIMB makes 90 percent of its revenue from Malaysia and Indonesia.
Maybank shares, also bolstered by a higher dividend yield of 5.7 percent versus CIMB’s 3.8 percent, climbed 7.6 percent over the course of 2011 and 2012, while CIMB lost nearly 12 percent.
CIMB has also struggled with costs as it revamps its consumer business and absorbs RBS-related expenses. Its cost-to-income ratio, at 56.6 percent in the third quarter of last year, was by far the highest among its Malaysian peers.
Some analysts said capital constraints could impede CIMB’s efforts to expand and consolidate. They note it is aiming to raise its core equity tier 1 ratio – a measure of capital adequacy – to about 10 percent from an estimated 8 percent now to meet stricter Basel 3 requirements on capital from this year.
CIMB has proposed a dividend reinvestment scheme in the first half of 2013 to bolster its capital reserve, offering investors a choice of receiving shares instead of dividends. CIMB’s recent sales of its insurance business will also help relieve it of extra capital requirements under Basel 3, Nazir said.
“I don’t think we’re capital constrained. We’re comfortable with our capital levels.”