CIMB’s decision to sell half of its international brokerage operation to China Galaxy Securities is an interesting step that tells us just how much China is expected to dominate the entire region’s financial services in years ahead.
Why would CIMB, whose CIMB Securities International business holds the group’s ex-Malaysia stockbroking businesses in Indonesia, Singapore, Thailand, Hong Kong, South Korea, the UK and the US, choose to sell half of the operation?
Not for the money. It is true that the bank has pledged to cut costs. But the S$167 million ($120 million) price for 50% of the business, representing 1.3 times consolidated net asset value, is pretty inconsequential for a bank that is doing just fine financially. Its first-quarter results to March 31, 2017 showed a record quarterly net profit of RM1.18 billion ($277 million), up 43.7% year-on-year on a pre-tax basis. The bank’s common equity tier-1 ratio stood at a healthy 11.3% at the end of December 2016 and has been moving upwards.
One could argue that it is a low-return business. International banks are exiting Asian brokerage left, right and centre, and in January CLSA CEO Jonathan Slone, who runs the biggest pure-play brokerage left in the region, described the intense difficulties involved in keeping the business profitable. “It is a viable business, but it needs to be sized correctly and it needs to be supported by other cash registers that you can monetize,” he told Euromoney.
The CLSA example is instructive because CIMB-China Galaxy fits into the theme epitomized by Citic Securities’ purchase of CLSA: Chinese domestic securities houses seeking to go global through acquisition or partnership with an international house.
And this is where we see a coincidence of interests that makes sense of the deal. China Galaxy has to buy into an existing business because it is very hard for a mainland institution to build multi-jurisdiction strength from scratch across institutional and retail brokerage, equities research and other securities businesses, which is what it is getting through CIMB.
It is a decent business, too, performing solidly in Asiamoney’s brokers poll in Indonesia, Singapore and Thailand, plus of course Malaysia.
CIMB, in turn, sees that any successful regional brokerage operation has to be linked in some way to trends involving mainland China, specifically the movement of capital from it to the outside world. CIMB’s statement confirming the deal speaks of China’s Belt and Road Initiative and says the venture will be well-placed to capitalize on China outbound M&A, China-Asean cross border investments and infrastructure funding.
Basically, regional brokerage businesses are going to have a hard time surviving without a little help. And China’s state-directed ambition to build its financial services competence internationally, in order to help with the reallocation of Chinese capital over the coming decades, requires an alliance with existing multinational businesses. It is a marriage that makes some sense and is likely to be followed by a sale of half of CIMB’s home-base Malaysian brokerage business in due course.
Tengku Dato’ Sri Zafrul Aziz, the CEO of CIMB Group, says CIMB’s stockbroking business “will effectively be repositioned as a pure play broker with the client base of a universal Asean bank.”
He says the deal represents “the embracing of a new paradigm for the stockbroking business,” which is another way of saying that selling half of it to China allows it to survive in a viable form.