CIMB sees Southeast Asia market revival driving profit growth

CIMB Group Holdings expects a more robust capital market in Southeast Asia this year to boost profit even if it’s unlikely to be sufficient to avoid a downgrade of its longer-term target for return on equity.Initial public offerings and corporate bond issuance could help drive earnings growth of as much as 15%, chief executive officer Tengku Zafrul Aziz, 43, said in an interview in Kuala Lumpur last week. Still, CIMB is expected to miss its own goal of a 15% return on equity by the end of 2018 in an industry hurt by higher capital requirements and slower economic growth, he said.Malaysia’s second-largest lender by assets has laid off employees and sold some non-core assets in the past two years to lower costs relative to income. It has also exited its micro finance business in Indonesia and scaled down operations in Thailand to focus on wealth management. The measures have helped contribute to a 23.5% increase in its share price last quarter, making CIMB the best performer on the benchmark FTSE Bursa Malaysia KLCI Index.“We’ve had two consecutive years where income grew faster than costs, we’ve shown that we can be disciplined if we want to,” Tengku Zafrul said. “Last two years, a lot of recalibration was done, restructuring. So now, we feel it’s time to build on this momentum.”The return on equity for Malaysian banks overall has dropped to about 11%, he said. It’s more realistic to aim for a return on equity of about 10.5% to 11% for 2018, Tengku Zafrul said. CIMB will focus on cost discipline to boost earnings and will be more rigorous in making new investments, he said.CIMB’s recent sales of non-core assets include the disposal of an 18.2% share in China’s Bank of Yingkou, while discussions to sell a stake in its brokerage business to China Galaxy Securities Co is expected to be completed by the end of June, Tengku Zafrul said. The company won’t divest its 52% stake in electronic payment provider Touch N’ Go, which is crucial to its digital strategy, and may look at increasing holdings in the company should the opportunity arise, he said.Companies in Malaysia may raise $3bn through initial public offerings this year or about 11 times more than last year, Tengku Zafrul said. Corporate bond issuance in Malaysia and Indonesia – its two biggest income-generating markets – is also expected to increase in 2017, he said.First-time share sales in Malaysia are expected to rebound from a 16-year low in 2016 as companies including a local KFC operator and developer Eco World International tap the market. That is expected to benefit CIMB as the company made more than a third of net revenue last year from corporate and investment banking.New corporate bond issuance in Malaysia is projected to rise to as much as 90bn ringgit ($20.3bn) this year and reach 150tn rupiah ($11.3bn) in Indonesia, Tengku Zafrul said.To grow revenue, CIMB also wants to focus on expanding the business in servicing small and medium-sized enterprises to grow its market share in the sector, Tengku Zafrul said. The bank currently ranks fourth in the segment with 9.2% of the market and it wants to be a top three lender in this category, he said.