When Zafrul Aziz became chief executive of CIMB in 2014 he embarked upon a transformation plan called T18, or Target 2018. Although CIMB was at the time the fourth or fifth largest bank in southeast Asia, it was not among the leaders in terms of profitability, return on equity, cost-to-income ratio or capital.
Zafrul Aziz, CIMB
“We were down there because we were in expansionary mode,” Zafrul says. “We did a lot of mergers and acquisitions to grow to where we are, but along the way markets turned against us and the investment banking franchise was affected.”
Hence the focus on reducing costs (the cost-to-income ratio stood at 59% when the strategy started, the highest among the 12 banks CIMB considered to be a peer group) and the capital adequacy ratio, which had been as low as 8%.
It was a painful process – the bank exited Australia, sold half of its international brokerage business, shut down Thai credit cards and cut headcount from 42,000 to 36,000 – but all the targets in T18 were achieved.
In March, Zafrul announced a new strategy called Forward23, for the next five years.
“Forward23 is about getting the engine up,” he says. “We have done the consolidation part and we have a very good base. Now we are telling our troops we need to start growing faster.”
He describes the slowing and consolidation of the last few years as “like a plane. We want to fix it, but doing so when it’s flying is difficult. So we land the plane, fix some of the things and it’s done.” Forward23 is about the bank taking off again.
Specifically, the targets are for a return on equity of 12% to 13%, a common equity tier-1 ratio of 13% and a cost-to-income ratio of 45%. Over the five years of Forward23, Zafrul has committed to invest an additional RM2 billion ($487 million) in technology on top of what he calls business-as-usual investment; 2019 will involve a tripling of investment.
It is another transformation for a bank that is quite used to it. Few banks have changed as much over the last 20 years. When Euromoney visited the then chief executive Nazir Razak at the turn of the century, CIMB was a niche investment bank. Since then, by acquisition and organic growth, it has turned itself into a universal pan-Asean bank – and ditched most of the investment banking.
“When you look at the DNA of CIMB, if you define it as the contribution of the profit to the group, then clearly it has changed,” Zafrul says.
The consumer and small and medium-sized enterprise businesses now account for 62% of revenue, having previously been below 50%.
“That is because we have put a lot of investment in this business,” he says. “We wanted more recurring, stable income.”
Investment banking has gone the other way.
“In investment banking, it’s very lumpy, very one-off, and margin compression is there, especially in the broking business, where the cost-to-income ratio is now above 100% as no one pays for research,” he says. “The whole business model has changed. You need scale and distribution and the infrastructure cost is too high.
“Nobody would ever have thought that CIMB, with its history and its roots, would sell 50% of its broking business,” he admits. “We arguably had the largest broking footprint in southeast Asia.”
It did sell, though, to China Galaxy in 2018.
But profit composition is, he argues, the wrong way of looking at the bank’s genetics anyway.
“CIMB’s DNA is how it is able to adapt to changes. Sometimes we have emotional attachments to decisions we make, but in CIMB, there is no such thing. If we think we have to move on and it’s time to change, we change.”
CIMB might have been transformed still further: in 2015 it announced a three-sided domestic merger with RHB and Malaysia Building Society. That deal fell apart and right now – given CIMB’s focus on streamlined, efficient simplicity – it seems like a good thing that it did.
“With hindsight, I think it is positive,” Zafrul says, although he insists that the initial rationale, based around cost synergies, was sound.
He says the deal came apart because of the valuation expectations of institutional shareholders and the question of whether or not the cost synergies – including an immediate headcount reduction of 10,000 people – could be executed.
“I don’t think we will exit investment banking completely,” he says. “It is still quite an integral part of our wholesale banking business.”
Zafrul says it can only do so because now CIMB has a balance sheet to support investment banking: “Today the play is always: ‘You want this deal, you give me the money’. It used to be different and you could win deals without the balance sheet.”
But times have changed and CIMB keeps changing with them.