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CIMB banking on China Galaxy

by October 22, 2016 General

Tengku Datuk Seri Zafrul Aziz, an avid golfer, has not played a game of golf for the past nine months. The head honcho of the country’s second-largest lender, CIMB Group Holdings Bhd, blames this on his hectic schedule.

Tengku Zafrul has been at TPC Kuala Lumpur since 6.30am seeing through the last-minute touches where the prestigious CIMB Classic is to be held for a three-day period until Oct 23. Later in the day, he would start welcoming clients of the bank to have a round of golf with some professionals of the game.

The tournament, one of the region’s largest golfing events, costs money but is part of CIMB’s branding initiative and important for its domestic business, as it commands 40% of the banking accounts in the country.

This sizeable number of accounts gives the regional banking group a certain degree of comfort.

However, there are undercurrents that would prove to be a challenge in its effort to grow income due to a weaker economy and changing banking landscape.

One of the initiatives to help it deal with its business and cost was the tie-up with China Galaxy Securities Co Ltd.

Tengku Zafrul was in Beijing for 10 days for that before hitting the links at TPC Kuala Lumpur, where the StarBizWeek team caught up with him.

The working trip to Beijing was important to CIMB, which has been trying to figure out a way to lower its cost from its stockbroking operations where the cost-to-income ratio (CIR) was 90% as opposed to the mid-50% range for the rest of the group.

Furthermore, conditions in the capital market for CIMB in South-East Asia have not been to its preference of late.

CIMB has a big stockbroking operation in this part of the world but has seen that side of the business flatline in recent times.

Singapore has not had an initial public offering (IPO) over the past two years, while IPOs in Malaysia have shrunk in size and numbers.

But the link with China Galaxy, on a 50:50 joint-venture (JV) basis, will help to fix some of this.

China Galaxy, a securities firm in China, has more trading activity than Hong Kong, Japan and Taiwan added together, and the almost online securities company should help CIMB market placements from its clients in South-East Asia to the markets of China and Hong Kong.

Cost rationalisation has been an integral part of CIMB’s Target 2018 (T18) initiatives that was unveiled by Tengku Zafrul early last year.

Since then, it has been undertaking various cost-management initiatives and ways to unlock value at the lender that is 29.7%-owned by Khazanah Nasional Bhd.

Under T18, the group is targeting to bring down CIR to less than 50% by 2018.

In 2015, its CIR stood at 59%, which was amongst one of the highest in the industry then. This year, it hopes to lower the ratio to 53%.

“The market in the last two years has not been good and the proposed tie-up will help cushion us.

“The stockbroking business is getting tough. The lacklustre equities market coupled with the adoption of technology is driving down trading commissions. Even some of our institutional clients have or are migrating to online trading,” says Tengku Zafrul.

The CIMB-China Galaxy JV is expected to reduce the former’s CIR by two percentage points, but this is only expected to be fully felt from 2018 onwards, noted reports that have come out following the announcement.

The process of completing the deal is expected to eat into much of next year, given the necessary regulatory approvals needed to be secured for the various countries,

According to Tengku Zafrul, the final details of the deal are being ironed out and it hopes to firm up on the structure within three months.

While the deal would boost the bank’s capital ratio, the increase is expected to be small, as the cash equities business is not capital-intensive, say analysts.

It is often thought that bank-backed stockbrokers tend to be in a better position to weather a downturn. But it would seem that they have not been spared.

In 2015, CIMB’s broking business incurred losses of RM20mil-RM30mil with an income of RM450mil.

Meanwhile, its cost of running the business is estimated at RM600mil to RM700mil, notes RHB Research in a report.

Stiff competition is pushing banks to divest their stockbroking business.

Interestingly, China Galaxy is a merger of four banks divesting their stockbroking arms.

Locally, Hwang Capital (M) Bhd and OSK Holdings Bhd divested their stockbroking arms, but these entities were not bank-backed.

Consolidation among local brokers was done at price-to-book value multiples of between 1.1 and 1.9 times.

However, the idea of divesting wholly was never on the table for CIMB, which sees value in Asean equities.

“We will continue to maintain our strength as a top-three broker in Asean … but margins are squeezed and trading flat.

“While Malaysia is flat and the Singapore market shrinking, Indonesia is showing signs of picking up following more positive business sentiment from two years ago.”

Tengku Zafrul describes the venture with the Beijing-based company as a “natural fit”.

It was also looking for strategic investors who could bring value to its franchise and support the group’s investment banking and capital market businesses.

Considering that China Galaxy does not have a presence in this part of the region, there will be less overlap except for perhaps Hong Kong.

CIMB could leverage on China Galaxy’s network to distribute an IPO or placement exercise to North Asia and vice versa.

It is reported that China Galaxy is ranked amongst the industry’s top-five in terms of brokerage revenue generated.

The company, which is listed on the Hong Kong bourse, conducts almost all of its trade online.

Notably, China Galaxy is not an unfamiliar party to CIMB.

In 2013, Khazanah emerged as a cornerstone investor in the pre-IPO of China Galaxy, reportedly investing US$100mil worth of shares. The sovereign fund later sold out at a profit. CIMB was also one of the advisers to that IPO.

CIMB’s latest venture adds on to recent deals aimed at unlocking value.

In June, it entered into a 15-year tie-up with Japan’s largest bancassurance player Sompo Japan Nipponkoa Holdings Inc.

Under this profit-sharing deal, which is expected to see a revenue uplift of RM1bil in the first five years, CIMB will sell and distribute Sompo’s non-life insurance products across the markets of Malaysia, Indonesia, Thailand and Singapore.

The group’s initiatives to contain costs seem to be bearing fruit, with CIR down to 55.4% in the first half of financial year 2016.

It is also on target to achieve a common equity Tier-1 (CET1) capital ratio of 11% in 2016 two years ahead of its 2018 goal.

The challenge Tengku Zafrul sees going forward is growing the group’s topline.

Nevertheless, its transformation has attracted investor interest.

CIMB’s share price has risen 11.85% from the start of the year, making it the best-performing stock amongst its peers year-to-date.

Based on yesterday’s price of RM5.04, the stock is trading at a price-to-book multiple of 1.03 times.

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