A battle between two titans will dominate the Malaysian banking scene over the next years. The impregnable position of Maybank, Malaysia’s largest commercial bank, could be under threat as its rival, Commerce International Merchant Bankers (CIMB) Group, prepares to try to wrest the number one spot from it, having bought a commercial bank this year to complement its top-of-the-league-tables investment banking franchise.
Meanwhile, Maybank is stepping up its investment banking operations with the much-delayed appointment of Surachet Chaipatamanont in July as head of Aseambankers, its underperforming corporate and investment banking unit.
“The gap between the first and second largest has been reduced,” says Adrian Chee, financial services analyst at rating agency Standard & Poor’s, pointing out that Maybank’s assets stand at RM209bn ($57bn) while the new CIMB now has RM152bn in assets. “By virtue of that and the management approach of CIMB, Maybank will be seeing increased competition in the domestic market from a much larger competitor.”
CIMB Group
CIMB Group merged its investment banking operations with sister company Bumiputra-Commerce Bank (BCB) in 2005 and, after a protracted battle, closed the acquisition of Southern Bank, Malaysia’s eighth largest, for RM6.7bn in March. It is now the second largest bank in Malaysia. CIMB is still busy transforming BCB, which had more than four million customers but a weak brand and poor quality of service.
| Datuk Nazir Razak, chief executive and managing director of CIMB, notes that putting the pieces together – new leadership for BCB and changing the culture to a performance-driven one – is ongoing, while he has been surprised at the ease of the Southern Bank merger due to the hostile tone adopted by the target’s management during the bid. |
“The merger integration process has gone smoother than expected and underlines how the two banks complement each other very well, as we argued,” he says.
CIMB sees the upside from the acquisition in consumer banking. In 2006 it expects this to be less than 10% of profits, with the rest coming from investment banking.
A factor in the decision to become a universal bank, according to Mr Razak, was that a big balance sheet is now needed for investment banking. In 2005 the bank bought a foreign stock broking business and in May it bought BNP Paribas Peregrine Securities in Thailand in order to continue being south-east Asia’s largest investment bank. The contribution of foreign operations is about 15%.
For Maybank, less than 4% of its $920m profit before tax in 2005 came from investment banking. Worryingly, the bank saw a drop in these profits from 2004 to 2005 – from RM207.8m to RM132.9m – indicative of a lack of direction that appears to have been modified.
“Unfortunately, I lost time in terms of the appointment [of a CEO for the investment banking unit] and we had wanted to acquire a boutique investment bank and failed, [so we] lost two years,” admits Datuk Amirsham Aziz, president and CEO at Maybank. “With the full set-up of leadership and teams, I am confident we will be able to catch up.”Others are less sure.
“You might see some market share being taken by a more proactive approach from other players such as Aseambankers but in the near term the incumbent players will continue [in their current places],” says Mr Chee.
Maybank fightback
It is worth noting, however, that the size of Maybank’s balance sheet and its corporate contacts mean it still ranks as number two, or more often three behind AmMerchant Bank in investment banking league tables in Malaysia. The newly invigorated Aseambankers investment banking arm is looking to increase its debt restructuring, advisory, derivatives and other off-balance sheet activity.
Another reason for Maybank to emphasise investment banking is that loans to large corporations in the country have been contracting as more of them have relied on the capital markets, as well as internal funding.
Meanwhile, Maybank’s main retail business has been growing apace. About 33% of the bank’s total income comes from commissions, with the target of raising this to 35% in the next couple of years. The bank has increased the average number of products it sells to clients from 2.4 in 2004 to about 3, and almost double that with some of the wealthier customers.
Underlining this strategy was its 2005 acquisition of Malaysia National Insurance Holdings through its insurance joint venture with Belgian group Fortis. It has also been looking abroad for acquisitions and wants to increase substantially the 15% of profits that comes from international operations.
While about one in four Malays continue to bank with Maybank, conditions are becoming more challenging for it and its competitors, without even taking into account its new-version CIMB rival, which may take some time to crank up into top gear. Factors include the squeezing of net interest margins, slowing loan growth on the back of higher interest rates and an increase in non-performing loans, plus the liberalisation of the banking sector under the auspices of the central bank, which is allowing the increased participation of foreign banks at a measured pace.
What will also have a competitive effect over the next years is the expected continuing consolidation in the industry. There are persistent rumours that banks such as RHB Bank and AmBank Group are due to be taken over.
Islamic banking
As Maybank and CIMB encroach on each other’s strongholds, there is one pie that looks large enough to accommodate them and others. Malaysia has become a centre for Islamic banking, products that are compliant with sharia law which, among other things, forbids interest.
“The growth of Islamic banking is much faster than conventional banking,” says Mr Aziz, adding that its start in consumer banking, such as mortgage or car loans, had spread to the corporate sector, which raises funds through sharia-compliant corporate bonds, called sukuks.
The government and the central bank, Bank Negara Malaysia, have a stated target that Islamic banking should account for 20% of all banking by 2010, up from the current 10%.
“The 20% target is not ambitious,” says Mr Aziz, noting that about 80% of corporate bond issuance in 2006 is expected to be Islamic. Already 46% of the corporate bond market consists of Islamic bonds, according to Bank Negara.
“It is an area where Malaysian financial institutions can command some stature, leveraging off where Malaysia is,” says Mr Razak.
But it is not only local banks that benefit. International banks based in Kuala Lumpur that focus on Islamic banking, such as HSBC Bank Malaysia, are also riding the wave of Islamic banking.
Some 15% of the bank’s total business is Islamic, and this should rise to more than 25% in 2008, says its CEO, Dato’ Zarir Cama.
This year it became the only foreign bank licensed by the central bank to set up an Islamic insurance joint venture. With only 5% of insurance in Malaysia being sharia-compliant, HSBC is expecting strong growth, mirroring what has happened in the banking market.
