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THERE IS MUCH about Commerce International Merchant Bankers Berhad, better known as CIMB, that belies its size. Apart from a small acquisition in Indonesia, the investment bank, a subsidiary of local financial conglomerate Commerce Asset Holding Berhad, has no meaningful presence outside Malaysia. Yet it already claims to be southeast Asia's largest investment bank. Its total assets were M$13.26 billion (US$3.49 billion) at the end of 2003 and its market capitalization is almost US$1.25 billion. With that kind of firepower and a dominant local market share in equity and debt issues, it is not surprising that CIMB has started to look abroad for growth.
In January, it announced the acquisition of the stockbroking businesses of Singapore-listed company GK Goh Holdings for S$239 million (US$145 million). Despite the move and CIMB's dominance in Malaysia, Dato' Nazir Razak, the firm's CEO (pictured), claims that the deal is more relevant to CIMB's future development strategy than evidence of an immediate need to expand. "One of my central arguments," he says, "is that the growth of the capital markets at the expense of the banking market is a strong story in Malaysia and we are still enjoying very strong growth from that. So the GK Goh acquisition is a need to diversify out of Malaysia in three to four years' time. We still have strong growth here."
The same forward-thinking, claims Razak, led CIMB to develop its debt capital markets business three years ahead of the competition. There is still much to play for domestically, claims Razak. "There's M$300 billion stuck in fixed deposits [in Malaysia] that can all go into the capital markets once the products are there," he says. "We just need to fill the gap."
Since the appointment of Razak as CEO in 1999, private banking, asset management, private equity and Islamic finance divisions have been added to CIMB's existing equities and debt operations. The firm, which listed on Bursa Malaysia in 2003, also made its first international acquisition that year when it acquired 51% of PT Niaga Sekuritias, now known as PT CIMB Niaga Securities, in Indonesia.
Yet despite these efforts, debt-related businesses continue to dominate CIMB's top line, accounting for 51.83% in 2003. In fact, businesses outside its existing debt, equities and corporate finance business accounted for just 3.32% of income. Consider that CIMB earns almost 97% of its income from businesses in which it already has domestic market shares of anything from 33% to 48%, and the importance of the GK Goh acquisition becomes apparent.
"Yew Lin, the son of GK Goh and I go back a long way," says Razak. "For the past two to three years we've been flirting with the idea of putting the businesses together. The thinking was some kind of JV arrangement, but about four months ago we got detailed in terms of what we should do and why. When we looked at what kind of structures we could deploy it became clear that it would be difficult to operate with two heads and two egos at the apex."
In fact, says Razak, the need for GK Goh to sell was probably at least equal to the need for CIMB to acquire. "GK Goh without the corporate investment banking that we bring to the table in the long term isn't going to be profitable," he says.
A fair price
The price agreed seems reasonable, although not a give-away. CIMB is acquiring the equities and research business of GK Goh for 1.35 times book value and, perhaps more relevantly, a price/earnings multiple of 13.7 times the business's annualized nine months' earnings to September 30 2004. For that, CIMB gets 100% of GK Goh's stockbroking operations, including institutional equities sales and research, retail brokerage and corporate finance. The deal includes offices in Singapore, Indonesia, Malaysia, Hong Kong and London and 23 research staff. It brings meaningful equities presence in Singapore, Hong Kong and Indonesia. GK Goh's market share in local equities in Singapore is 12% and in Indonesia 3.2%. Razak claims that the Hong Kong office's revenues, where it trades local equities with a full licence, is 15% of GK Goh revenues.
Razak is realistic about what CIMB has acquired and modest in his immediate ambitions. "They have a good niche," he says, "a long history in the business and a reputation as a very honourable house. The profile they have is tremendous. Their clients may not be tier-one accounts but they're there."
Razak sees the deal in part as a means of enjoying a greater share of commissions on underwriting primary equity deals. It is not certain that CIMB will get it however. Additional regional equities distribution is one thing, but the real clout in claiming economics on new issues lies with European and especially US distribution.
That is clearly some way off for CIMB GK as the new investment bank outside of Malaysia will be known. "Our plan is to create a regional brand CIMB GK and maintain CIMB onshore," says Razak. "That signals our intent to some extent; that the two businesses will not be integrated in full. I don't see the need to integrate their retail business with ours: there's no value creation. Yes there may be potential synergies but they can come down the road."
In the meantime, Razak and his team are touting the expanded regional reach of the franchise as the principal immediate benefit of the deal. Billed as the 'Gateway into southeast Asia', in addition to expanded equities trading within local Association of South East Asian markets as they continue their recovery from Asia's financial crisis, CIMB GK will aim to capitalize on the expected cross-border flows in M&A, particularly between Singapore, Malaysia and Indonesia as well as increased primary equity issuance. There are also plans to open a research office in Thailand. It could be a powerful strategy if, as expected, regional markets continue to recover: the combined Malaysia, Singapore, and Indonesia markets are quite big and cross-border flows are increasing, albeit from a low base.
But can CIMB GK compete with the bulge-bracket banks to get its fair share of the kill? Razak admits that CIMB has used the government's protection of domestic businesses to the full. "The Malaysian government was sensible in liberating the financial services industry and we used the protection to grow whenever we could," he says.
He is equally realistic that such benefits will not be coming CIMB GK's way. "We're ready for the competition [overseas], because today we don't have much protection onshore. So at least we have half a chance," he says.
He may need more than that. "We don't bring the full investment banking model yet, ex-Malaysia," he says. "It'll be tough of course, but there are cross-border flows and there is a pricing advantage since my cost structure is much lower than the bulge brackets'."
Aggressive lowballing
Yet basing a strategy on price advantage is clearly not going to work in the long term as Razak is already seeing in his own backyard. "You have a serious problem here [in Malaysia]: the banks are charging 50 basis points for a CB [convertible bond]. That's low-balling for you! It's because they want to get league table status."
Razak also knows that the firm doesn't have the firepower to match the biggest competitors but thinks there is a way to cope with this. "Compare us to a bulge bracket," he says. "We don't have a large balance sheet. But how much of the balance sheet do they actually commit to the region?" He might be right, but as most large corporate and buy-side clients will admit, the fact that the balance sheet is there at all is crucial.
With little prospect of muscling into the larger deals outside Malaysia, therefore, CIMB GK will need to earn its crust taking on smaller regional and local players. Eventually, it will also need to move into the much larger north Asian markets, perhaps via its new Hong Kong foothold, if it is to take a realistic tilt at regional status. Should Razak's strategy prove successful, CIMB GK could yet become the first truly regional investment bank since Peregrine Investments, the Hong Kong regional bank that fell victim to a lethal combination of the Asian financial crisis and corporate hubris.