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Finance

Lender brings out the cost-cutting knives

SINGAPORE -- CIMB Group Holdings, Malaysia's second-largest lender, finds itself trying to restructure through cost cuts. In 2014 it suffered through a rocky currency market, a called-off megamerger, and low oil and commodity prices that left its clients woozy. 

CIMB Group CEO Zafrul Abdul Aziz

     The bank on Friday posted disappointing results for 2014, with profit plunging to 3.1 billion ringgit ($857 million), down 32% from 2013. Its poorly performing Indonesian arm, CIMB Niaga Bank, was the main culprit. Lower commodity prices as well as a presidential election last year deterred companies from investing in Indonesia. CIMB Niaga's profit before tax almost halved in 2014.

     A surge in the amount of capital CIMB had to put aside at its corporate loan operations in Indonesia and Malaysia in the last quarter of 2014 also pressured profit. Allowances made for impaired loans, advances and financing during the quarter jumped to 919 million ringgit, almost three times more than a year earlier. During the earnings announcement Friday, a CIMB executive called performance in 2014 "the worst in our history in terms of return on equity," which stood at around 9%.

     This year, the bank will get serious about restructuring. Zafrul Abdul Aziz, the group's newly appointed CEO, spent a good amount of time Friday explaining his turnaround strategy, which he is calling Target 2018, or T18. "Our past plans have focused more on expansion of revenue," Aziz said. "But T18 is very much focused on costs, and that's the key difference."

     Aziz wants to cut CIMB's cost-to-income ratio from the current 59.1% to below 50% in 2018.

     Aziz is personally supervising the turnaround strategy and has assigned each department numerical cost and profit targets.

     Investment banking will come in for deep cost-cutting. Plans are to trim 30% off of the arm's operating costs this year. The bank has already cut around 150 jobs since the beginning of this month, most of them from its Asia-Pacific equity-related operations and by terminating investment banking operations in Australia.

     The cost cuts are expected to not only improve the bank's profit margin but also allow it to reallocate resources to banking services for consumers and for small to medium-size enterprises, which the bank sees as growth pillars. They should also allow for spending on technology upgrades.

     The cost-cutting is in stark contrast to last year's gung-ho expansion drive, which was to include a merger with two smaller Malaysian banks, RHB Capital and Malaysia Building Society. The plan emerged in mid-2014, then was officially called off in January. The three banks blamed changes in the economic environment.

      Crude oil and commodities prices have been plunging since last year. As a result, Malaysia, a net oil exporter, has been suffering economically. A number of Malaysian companies operate in oil, gas, palm oil and related sectors. CIMB's loans in Malaysia expanded 7.1% last year, slower than the 12.3% clip in 2013.

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