CIMB in talks for its securities business

CIMB Group Holdings is in talks with foreign banks over creating partnerships for its securities business; some partnership scenarios include CIMB disposing of some stake in one, or a few, of its securities businesses. This follows a management meeting last week, where new focus outside of Asean was discussed. CIMB has declined to comment on the reports.

This article first appeared in The Edge Malaysia Weekly, on January 25 - 31, 2016.

CIMB Group Holdings Bhd is in talks with foreign financial institutions to potentially form partnerships for its securities business. The working relationship options it is exploring include selling part of the group’s stake in the securities business, sources say.

“Investment bankers have arranged meetings between CIMB and foreign financial institutions to discuss potential partnerships. Some partnership scenarios include the local banking group disposing of some stake in one, or a few, of its securities businesses,” says a source familiar with the matter.

Another source notes that the talks are still preliminary.

“Yes, there are talks, but it is still early days. Each party wants to ensure that it is a positive deal for them in the challenging landscape today ... so, it is taking some time,” says a banker familiar with the matter.

“CIMB wants a partnership structure that can help it improve its cost-to-income ratio, but at the same time does not involve another round of job cuts. From what we understand, CIMB wants to avoid the job-cutting route, if possible,” he says.

CIMB declined to comment when contacted by The Edge.

CIMB’s management met with analysts last week and one of the things it guided was that any future rationalisation will focus on its operations outside Asean.

It is interesting to note that the group’s businesses outside Asean are mainly in the securities segment.

“Other areas being reviewed would be operations outside Asean (the group also has businesses in Taiwan, South Korea and India) as well as support functions for countries outside Asean, which are based in Singapore,” notes Maybank Investment Bank Research in a Jan 20 report.

CIMB’s foreign securities business is parked in Singapore under CIMB Securities International, which serves institutional clients in Asia-Pacific as well as global investors in the region’s equity markets.

CIMB Securities International was formerly known as G K Goh Stockbrokers Pte Ltd. CIMB acquired the foreign stockbroking and investment banking businesses from the G K Goh group in 2005.

The S$239 million acquisition — its biggest foreign acquisition at the time — gave CIMB a platform in Singapore as well as other overseas markets such as Indonesia, Hong Kong, the UK and the US.

In 2012, CIMB Group acquired most of the Asia-Pacific cash equities and associated investment banking businesses of the Royal Bank of Scotland (RBS) in a deal valued at over RM800 million.

The RBS purchase transformed CIMB into an Asia-Pacific investment banking player, but raised questions as to whether the local banking group had overstretched itself.

CIMB’s earnings have suffered recently and today, it has one of the lowest common equity tier 1 (CET1) ratios in the industry.

In a Jan 21 research report, Maybank IB Research says that while the debate rages as to whether CIMB, with its fully loaded CET1 ratio of 9.1%, needs to raise capital, management maintains that the group does not need to do so.

It adds that CIMB will continue to focus on improving risk weights while expediting non-core asset sales to take its capital ratios up.

As at Sept 30, 2015, CIMB Group’s total capital ratio stood at 13.4%, while its CET1 capital ratio was 9.3%.

In a move to consolidate and manage its ballooning costs, the country’s second largest banking group slashed jobs substantially last year and closed its offices in Sydney and Melbourne, Australia.

In its results note for the nine months ended Sept 30, 2015, CIMB says its business-as-usual cost-to-income ratio improved to 56.2%, from 57.8% a year earlier, as its cost management initiatives begin to show traction. The banking group targets to achieve a cost-to-income ratio of below 50% by end-2018.

Hong Leong Investment Bank Research says that for 2015, CIMB’s management told analysts that it was keeping to its cost-to-income ratio for 2015 at 55%.

“For 2016, management hinted that it should not deviate significantly from 2015, as it is looking to contain cost growth of 3% to 4%,” it adds in a Jan 21 report.

Last year, CIMB cut about 150 jobs outside Malaysia and Indonesia. It also undertook a Mutual Separation Scheme (MSS) for its Malaysian and Indonesian businesses, under which 3,599 applications (1,891 from Malaysia and 1,708 from Indonesia) were approved.

CIMB group CEO Tengku Datuk Seri Zafrul Aziz told reporters early last week that the group is not planning any more MSS in Malaysia and Indonesia.

“The focus this year will be on improving our productivity and continuing our T18 [Target 2018] agenda. In short, there will be no more MSS or retrenchment,” he said.

The banking group recently retrenched 32 employees at its Hong Kong investment banking and equities operations. Zafrul said the group’s decision to let go of staff in Hong Kong was due to tough capital market conditions across Asia, especially in Hong Kong.

The operating landscape has been tough and the turbulence is expected to continue this year amid economic uncertainties.

CIMB’s share price dipped below RM4 last week, to a five-year low of RM3.94 last Thursday. Indeed, the bank’s share price has been on a slippery slope since mid-2013, falling from RM8.50.

The banking group’s fourth-quarter results, which will be released next month, will be closely watched.

CIMB Group saw its net profit fall 30% year on year to RM2.06 billion for its nine months ended Sept 30, 2015.

The bottom line was hit by the huge provisions it had to make for its Indonesian business, which has been saddled with bad loans due to a weakening economic environment.

The allowances made for impairment losses on loans, advances and financing more than doubled to RM1.59 billion in September 2015.

Hong Leong Investment Bank Research notes that although CIMB’s provisions in Indonesia will likely remain elevated in 2016, they will come in lower than in 2015, with the weakness confined to the commodity segment.

“For Malaysia, management expects a slight deterioration in asset quality (particularly within the retail segment) given the economic sentiment and limited room for further improvement (as impaired loans and provisions are already at low levels),” the note adds.

The 12-month consensus price for the stock among analysts polled on Bloomberg is RM4.76 with seven calling “buy”, six a “sell” and 11 a “hold”.

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