Tuesday, September 15, 2009
Nazir Razak's Interview
Nazir Razak, in my view, one of the top 10 CEOs Malaysia has ever produced in the past 50 years, was awarded the prestigious Lifetime Achievement Award by FinanceAsia for his contribution to Asian banking and finance. What makes a good CEO? If you trace the history of CIMB and Bank Bumiputra, you will appreciate the fact that he has put in plans to move the group continuously up the value chain by creating innovative products, taking calculated risks, drive at a meticulous utilisation of capital and enforcing strict minimum returns on operations. The culture and mindset is very progressive, he convinced the board of the need to pay for top talent and to reward them greatly when they perform.
Critics will say that the group has nurtured strong ties with the government to be the first in line for first bite at any cherries - but they still had to nudge Maybank aside. Investment banking is not based on ties alone, you have to think "value-driven", "value-add" and persuasive strategic motives, and add to that a strong network of international banks to raise funds instantaneously when needed. Cultivating ties is highly essential in banking, you must have the ability to knock on the doors of Khazanah, EPF, PNB EPU, etc... but in the end, you must also deliver something of value. Can other banks do it? Well, many give up even before they started, just look at most of the local banks, they don't even have a decent investment banking unit, so don't go around to say Bank Bumi Commerce is a favoured animal because you all have not put up any decent team or has any inkling what investment banking is all about.
In terms of market cap, it has just pulled away from Public Bank and is now just a few billion ringgit away from overtaking Maybank. To me, Bank Bumi Commerce will be the country's biggest bank within a year and will continue to stretch the margin over its competition - why, because of "the path" it has set itself on. Some may quibble on the highish valuations, but that's a deserved premium when you consider the assets, its market positioning, the staff and "the path".
The next challenges on his plate:
- is to ensure their foreign acquisitions maintain that standard, execution ability and deliverables
- grow the branding, penetration and market acceptance in retail banking
- it has established a good lead in Islamic banking and finance, now is the time to leverage and extend that lead, esp in sukuk and shariah funds management
- cultivate to be a premier force in local property lending and refinancing markets
- work through a cohesive strategy with Khazanah, PNB and EPF to increase the free float of listed GLCs
- look deeply into securitisation, get the central banks in Malaysia and Indonesia to be on the same page
- further elevate the research standards with a view on timeliness, effectiveness, results-oriented and out-of-box thinking on strategic issues
- there is still enormous opportunity in structured put and call warrants, think not just the top 30 companies, but overseas majors and indices including commodities, forget about basket warrants (they are difficult to follow and value)
- look at being a substantive distributor and placement agent for major Asian IPOs from China and Indonesia in particular, start cultivating strong ties
Below was the insightful interview with FinanceAsia.
What has been the key to CIMB's positive financial performance over the past year?
I think the performance has been pretty consistent with the rest of Malaysian banks. This is fairly surprising to some people, as we have a fairly large business involving capital markets and indeed we are the most active in the global financial markets. We were able to achieve this in part because in 2008, the turnaround of our consumer banking business actually came through and therefore that was able to offset the 35% decline that we saw in our capital markets business. At the same time, we took rather big steps with regard to our counterparty risk positions and also managed our liquidity very prudently and so this helped insulate the firm from many of the global shocks.
What was the most challenging decision you faced during that period?
Actually, the most challenging decision I faced was whether to proceed with the acquisitions we had embarked on during that period. If you looked around in the region and elsewhere at the time, people were reneging on deals left, right and centre. And there were times when some people thought that finance was going to fall off the cliff. So it was quite hairy as we had M$5 billion ($1.4 billion) worth of acquisitions on the plate. We had to look at it all very carefully, steady ourselves and believe in our view, which is that this is for the long term and we can still create value even though valuations were off, relatively speaking.
What was the original motivation behind the strategy of acquiring more banks and becoming a regional player?
In the early part of 2004 we were a liquid, Malaysian investment bank that had 30%-40% market share, and when we looked ahead we were wondering where to go to grow? So we decided we had to look around regionally. And then we made this rather dramatic acquisition of GK Goh. Then we started looking around even more in the region and quickly we realised we were not going to get very far without a bigger balance sheet. At the same time, I looked at the way accounting was going -- mark-to-market accounting, etcetera -- where accountants lost their prudence and basically decided to go with anything that smoothed out earnings. That made it very difficult to be a listed pure investment bank. And the third thing that came into play was a convergence of interests. The GRC [governance, risk management and compliance] reform in Malaysia was just beginning, and the new Khazanah [the investment holding arm of the government] mandate came into play -- they were encouraging companies to re-energise themselves [and merge]. So we had a sister bank, Bumiputra Commerce Bank, that was in dire straits. There was a convergence of interests. The holding company of BCB hired McKinsey and asked them what to do. And when they came to me and asked me what I thought, I said to them, 'Look, for the first time as consultants you are actually going to get a solution. This is the solution. We merge the investment bank and the commercial bank and I will run it.' In the past, there had been overtures for me to just cross over and go run the commercial bank but I thought that lacked scale. The best thing to do was to merge the two entities, to merge the people. And all that came together in 2005. From a larger perspective this was also about economies of scale. I think a commercial bank needs a regional-level scale. We feel the right position for us is to be between mindlessly global and hopelessly local. And I think we've found that position.
How difficult is it to manage the transition from being a Malaysian bank to a regional player?
In some ways it is actually easier for us. Think about it -- is it easier for me to go to Indonesia or for a global bank to go to Indonesia? And in terms of solutions that we offer, do I understand the requirements of say the development of a rupiah-bond market better than a global bank, given the Malaysian experience in the region? I do. You must also remember that when we go into these markets we try very hard to make sure that it is not just CIMB, but rather it is a combination of CIMB and a local franchise coming together. As a result, people see us as local. If you go to Indonesia they see us as the old Bank Niaga franchise plus CIMB. If you go to Thailand they see us as the old Bank Thai guys plus CIMB. And even in Singapore they see us as the old GK Goh franchise plus us. In a way, we want to be seen as a local brand.
I do remember when you were making some of those early acquisitions a lot of people said: 'This isn't going to work'. Were your investors among those critics or were they on board from the beginning?
They weren't all onboard. When the group first entered Indonesia in 2002 the stock got panned and we lost about 25% in value when we announced the acquisition of Bank Niaga. Keep in mind this was at a time when some people thought Indonesia was in bad shape. We were the first -- and only -- people who bid for Bank Niaga. At the time the feeling was: 'Why are you going into Indonesia? Do you know what you're getting into?' So on and so forth... But since then we have proven that we can do business in Indonesia, and indeed in general, that we can do business abroad. But you know we have been very careful about winning investor confidence. One of the things we do is that every time we do a transaction we take investors through, in quite a lot of detail, every step of what we plan to do and why we think this is a good transaction. We actually show the books and explain the synergies.
What's the importance of Asean as a region and how has that changed with China's growing economic and political power?
I think, in many respects, we are a microcosm of what Asean is all about. I think the individual Southeast Asian countries on their own will struggle unless they come together as an asset class and as an economy. I see a lot of upside, specifically with intra-Southeast Asian trade and travel, if we come together. So we have to come together from the external perspective, if you like, because when investors look across their options they need the size and potential of a 600 million population investment choice. And then you have China. Asean has a lot to offer in the new global landscape given our proximity and connections to China. And I think we are very comfortable with that point. When [Ming Dynasty admiral] Cheng Ho came to Malaysia he dropped off a princess for our royalty to marry in view of building relationships. When the Portuguese came we got invaded. We prefer the Chinese approach.
What is CIMB's strategy in China? I know you already have a presence there.
I think it's going to be very step-by-step. We see ourselves first as a regional bank, but you have to have some operations in China. We have to facilitate our companies that are investing in and doing business with China. And the ability to do that is strengthened when you have some presence in China. So our first step, is a very tentative step, it is a small investment in a bank in Yingkou [in Northern China]. First we will see how we do and then we will go back to our shareholders and let them know how we want to move forward longer-term.
There is a view that Malaysia is still overbanked. As banking sector libereralisation opens Asean markets to foreign rivals, how well placed is CIMB to compete?
We've seen different stages of liberalisation over the years. If you play it right, liberalisation is always an opportunity for stronger banks to become even stronger. When we were an investment bank we saw the liberalisation of that industry actually strengthened us, while the smaller, more marginal players struggled to survive. I think in [commercial] banking it won't be dissimilar, I don't disagree that we are overbanked. I don't know what the right number [of banks] is, perhaps five or six, rather than the nine today. For us, our strategy is to become very regional so I don't think we're going to play a big part in any consolidation.
How important, longer term, is investment banking to CIMB group?
You know we are very strong believers, despite what some people say today about the concept, in the universal banking model. I think there are very strong synergies between capital markets, treasury and retail. At the heart of the franchise is just this -- this model, which is very powerful. But it is very tough to manage. From the beginning I've always said it's all about the ability to manage both traders and tellers in one organisation. Can you get them to talk together and work together? In that regard, we think it is very important to be strong in both areas.
What has to happen, or at what point do you think you will have achieved your vision of CIMB?
In 1996 we had a clear vision of what we wanted to be. We announced a mission statement that we wanted to be the No. 1 investment bank in Malaysia. In many respects that was achieved and that is why we have had to move on. Now, that vision statement is to lead in regional universal banking in Southeast Asia. We are far from it. To be there, we would have to be really seen, in terms of earnings, in terms of customers' attitude, in terms of shareholder composition, as a truly regional bank. Today, yes, we have the best regional platform but we are still predominantly a Malaysian bank. The transformation will take several years, but it will happen. I am on the record as having said that by 2015 Indonesia will make up a bigger component of our business than Malaysia. But we also want to be seen -- be it by the international investor or the Thais or the Filipinos -- as a truly Southeast Asian franchise.
The global banks have been badly shaken by the financial crisis, but Asia's banks have been relatively unscathed. Was this a result of good luck or good judgment, or both?
I don't know whether you describe it as luck or judgment but a lot of it is because Malaysian banks and regulators learnt very hard lessons during the Asian financial crisis. I know some people say we caused this current crisis because we all started saving like hell -- but if you look at the way we are regulated we are all clearly operating based on a very strong memory of what happened. And today, I don't think a couple of weeks can go by without Bank Negara speaking to Bank of Thailand or Bank Indonesia about CIMB -- and I think years go by without the Fed speaking to the state regulators in Europe.
We have seen the consequences of poor oversight and regulation of the financial services industry in the developed market. What lessons do you think this current financial crisis presents for banking industry reform in Asia?
If the global financial crisis had happened say five years later, the damage in Asia would have been worse. I think it is for us, at the very least a sanity check. For the world, it is forcing a very hard look at finding out what is the right way of banking. But one of the difficulties is, we obviously have to agree on what were the causes of the crisis and move on from there. Yes, there were causes that were outside banking per se, but there has also been under-regulation of global banking. There has been the issue of globalised networks that are governed by a wide variety of domestic and local regulation. That doesn't work. But yet, can anyone really see a global regulator? How do we deal with this? But it's absolutely required that we do deal with this. If you look at the leverage or arbitrage that was going on, it was incredible. I can't for the life of me understand how banks were 50 to 60 times leveraged. But they were able to do it because they were regulated in one country and leveraged in other markets and their primary regulator didn't know about it and couldn't see it quite clearly. All this has to be dealt with, otherwise this crisis will happen again.
p/s photos: Marsha Milan Londoh