Dear Shareholders,

The year 2012 was a sterling year for CIMB Group. We successfully balanced delivering on earnings growth and conservatism on asset growth, while also implementing substantial changes to strengthen our competitive edge for the future.

The year 2012 was defined by the substantial changes of ‘CIMB 2.0’, an internal organisational step change to recalibrate and accelerate our businesses. Starting in late 2011, we have been making significant improvements to the structure of our organisation and our business models. We have also invested in many new senior managers, strengthening our leadership bench. We closed the year delivering a 16.0% return on our shareholders’ equity, and an expanded and more competitive business across ASEAN and key markets beyond.

The operating environment for banks everywhere tightened through 2012 as global re-regulation gathered, margins compressed and pressure from competitors continued. In spite of all the news of western banks deleveraging and retreating, competition in ASEAN banking actually got fiercer because the region remains an oasis of economic growth for global banks and more peers from the region also stepped up their game. New rules, laws and compliance standards on capital adequacy, stress testing and other related issues seemed to sprout incessantly over the year.

With this global backdrop, it was timely that we decided to re-look at our business and launch ‘CIMB 2.0’ to systematically identify changes we need to make to generate more internal synergies and strengthen our competitive edge. As much as we have achieved since 2005 when we embarked on our journey from Malaysian investment banking to regional universal banking, we still need to think about what we could have done and what we should be doing better. With a raft of new regulations, relentless technological changes, and new competitor strategies, can we recalibrate and improve some of our business units? Do we have people with the right skill sets in key leadership positions? These were some of the questions we asked as we planned for ‘CIMB 2.0’.

‘CIMB 2.0’

Towards the end of 2011 we announced ‘CIMB 2.0’ as our corporate theme for the coming year. We told staff it would be a year of major reforms, but I think it was hard for many employees to grasp the scale of changes ahead.

Our first move was to consolidate all corporate lending and deposit taking, transaction banking, and treasury markets activities under a single division, known as Corporate Banking, Treasury & Markets (CBTM). The consolidation has brought about one CBTM division fully integrated within each market and across the region and responsible for practically all wholesale risk taking in the Group. We quickly realised benefits through increased crossselling, product bundling and reduced process duplications and these contributed to the strong uplift in treasury markets profits in 2012. For Investment Banking (IB), what we felt we needed for ‘CIMB 2.0’ was to increase economies of scale, strengthen our presence outside our core ASEAN markets and enhance our value proposition to ASEAN corporates and institutions.

The opportunity to advance these objectives came with two prescient purchases. In April 2012, we completed our acquisition of SICCO Securities, which catapulted our equity broker rankings in Thailand from No.26 in 2011 to No.12 in 2012. In the same month, we announced our plans to expand our operations beyond ASEAN with the acquisition of selected Asia Pacific cash equities and investment banking operations of the Royal Bank of Scotland (RBS APAC IB platform). We acquired about 300 staff across the region and new on-shore presence in Australia, as well as substantially enlarged operations in Hong Kong, China, United Kingdom and United States. Early 2013, we will complete the acquisition with the launch of our new investment banking operations in Korea, India and Taiwan.

Once our acquisition of the RBS assets completes in April 2013, CIMB will become the largest Asia Pacific-based Investment Bank (ex-Japan) with a platform that provides research coverage on over 1,000 companies across the region, access to a wide reach of institutional investors across the globe and mergers and acquisition (M&A) and capital market execution capability in all major markets in Asia Pacific.

The RBS APAC IB platform acquisition positions us perfectly to catalyse and benefit from rapidly rising intra Asia business and capital flows. As a brokerage franchise, the enlarged platform will give us the economies of scale to compete at the highest levels. For capital market transactions, the deal helps us to ‘raise our game’ in our increasingly competitive home market of ASEAN by offering clients much wider global distribution, a stronger suit of sector specialist bankers and improved processes.

‘CIMB 2.0’ for our Malaysia & Singapore Consumer Banking (MS Consumer Bank) franchise came in the form of merging and integrating our various operating units – Consumer Sales and Distribution, Group Cards and Personal Financing, Commercial Banking and Retail Financial Services – into one MS Consumer Bank. Whilst the original model had worked well in the initial years after the 2005-2006 merger with CIMB, Bumiputra- Commerce and Southern Bank, we had outgrown it. The model tended to inhibit cross-selling and product bundling and create duplications especially in support functions and these disadvantages had begun to outweigh the benefits of more ‘mono-line’ structures.


The MS Consumer Bank integration also saw the appointment of a new overall Head of MS Consumer Bank and several new senior leaders.

Although still in its early phase, we believe that the integration will generate process efficiencies, improved products and better teamwork within the consumer bank in Malaysia and Singapore and also improve collaboration with our consumer banking units in other markets. In 4Q 2012, we saw some encouraging data points to support this conviction.

As our network and franchise continues to expand, risk management grows in importance. ‘CIMB 2.0’ was extended to this key support function. We appointed a new Chief Risk Officer and initiated a holistic review of the division across the region. A new Risk Playbook has been agreed with all internal stakeholders, and through 2013 our risk processes will get better and our risk taking deliberations will be even more thoughtful. We also anticipate significant talent infusion in Group Risk Management in the course of 2013.

Another element of ‘CIMB 2.0’ has been to evolve our Group Strategy division to oversee our private equity and strategic investment portfolios. Group Strategy and Strategic Investments (GSSI) will now be able to leverage our M&A and business integration experience to assist our various strategic and private equity investee companies and look at opportunities to launch new institutional funds as well. Our ‘CIMB 2.0’ theme will continue into 2013 as we follow through on various initiatives and explore others.

FINANCIAL PERFORMANCE

CIMB Group achieved another year of record net profits of RM4.3 billion, representing an increase of 7.8% from the previous year. We recorded a net return on equity (ROE) of 16.0%, slightly lower than the 16.4% achieved in 2011.

Revenues grew by 11.3% with interest income increasing by 10.6% and non-interest income by 12.7%. The growth in interest income was underpinned by a 11.8% increase in total credit (loans and bonds, excluding ‘Bad Bank’ assets) and only a marginal five basis points decline in net interest margins. Non-interest income growth would have been an impressive 19.8% if not for the effect of the one-time gain on deconsolidation of CIMB Aviva in 4Q 2011, driven by a record year for us in both capital and treasury markets as well as good growth in wealth management and banca income.

Our loan provisions dropped by 32.4% compared to 2011 as credit cost came in at a low 16 basis points. These can be attributed to improved in loan recoveries, especially at our ‘Bad Bank’, and a one-time technical write-back exercise at our MS consumer bank. CIMB Niaga’s credit charge for the year was 80 basis points in 2012, about the same as the previous year.

Overheads increased by 14.8% Y-o-Y and cost to income was 56.4%. If we exclude the impact of new acquisitions, the increase in overheads was 11.9% and cost to income was 55.1%. Profit before tax (PBT) increased by 9.1% to RM5.7 billion while net earnings per share increased by 7.7% to 58.4 sen per share. There was no change in our share capital during the year.

Our overall regional wholesale business PBT was up 23.1%. The new CBTM division had a good first year with PBT growth of 23.7% while Investment Banking grew its PBT by 18.3%. We had an excellent year in regional capital markets and saw good growth in treasury market activity, especially in intermediating forex flows across the region.

Our MS Consumer Bank PBT grew by 17.7% Y-o-Y significantly aided by net write-back in loan provisions. Revenues grew by 6.4% as asset and liabilities growth moderated but non-interest income was up a commendable 12.2% on the previous year.

CIMB Niaga’s PBT grew by 31.8% Y-o-Y despite credit growing by only 15.7% as we improved our liability cost and non-interest income. Out performances came at CIMB Niaga’s treasury & markets and consumer bank. CIMB Thai’s PBT contribution to the Group was up 21.2% Y-o-Y. Gains arising from our share of recoveries of legacy assets sold to the Thai Asset Management Company had a big impact on CIMB Thai’s contribution for a second year in a row.

CIMB Singapore grew strongly, with the bank’s PBT up by 100% as its consumer operations almost broke even and its wholesale business grew very well. However, our Singapore securities operations lost RM8 million due to low market volumes and higher cost.

PBT from Investments dropped by 51.2% Y-o-Y to RM487 million due to a combination of the large RM250 million gain on deconsolidation of CIMB Aviva in 4Q 2011 and upfront costs arising from the acquisition of the RBS assets. Return from our 19.9% investment in Bank of Yingkou was flat this year due to a combination of lower GDP growth and thinning margins. Touch n’ Go and Tune Money profits after tax to the Group were up 36.4% and 180.8% but their contributions remain small. Nevertheless, prospects for both units have improved tremendously as a result of developmental work undertaken during the year.

In 2012, total non-Malaysian PBT increased to 41% of the Group’s total PBT compared to 36% recorded in the previous year, as we saw higher growth rates at our main non-Malaysian entities.

The Group’s total credit grew by 11.8%, of which loans (excluding ‘Bad Bank’) were up 9.8%. When adjusted for currency translation effects, credit and loans were up 14.1% and 12.1% respectively. Consumer loans grew by 11.4% while wholesale credit was up 12.3% as we kept to a strategy of growing assets moderately in tandem with our view of underlying risks in every market and segment that we operate. Gross impaired ratios were lower at 3.8% compared to 5.1% at the beginning of the year, while allowance coverage increased slightly to 82.8%

At the year end the Group’s ‘anchor’ bank, CIMB Bank, recorded strong capital with the risk weighted capital ratio standing at 16.0% and Tier 1 capital ratio at 12.8%, after inclusion of FY12 net profit and the proposed Dividend Reinvestment Scheme (DRS). CIMB Group’s gearing and double leverage ratio was 26.1% and 124.1% respectively.

SHARE PRICE PERFORMANCE AND SHAREHOLDER RETURN

Although management is pleased with the Group’s performance and our financial results, our share price continued to underperform. Over 2012, CIMB Group’s share price increased by only 2.6% from RM7.44 on January 2012 to RM7.63 on 31 December 2012. Our share price underperformed against the FBM-KLCI and KL Financial Index (KLFIN) by 7.8% and 9.5% respectively.

We think the primary reason for our weak stock performance is our key valuation matrices relative to peers. We have to improve expectations of near term ROEs and key ratios especially those relating to cost, capital and asset quality. At the same time though we cannot compromise on long term value creation which sometimes draws on near term costs and capital and adds uncertainties and complexities to the business.

Over the period since we began our transformation in 2005 our Total Shareholder Return (TSR) remains at an impressive 140.7% versus the KLCI.

The Group met its dividend payout targets for 2012 amounting to RM1.7 billion or 23.38 sen per share. This was split into two interim dividends payout of 5.0 sen and 18.38 sen which were declared in August 2012 and February 2013 respectively.

The second interim dividend is declared in the form of cash or DRS, which offers shareholders the option of reinvesting their dividends in new shares. The DRS has been introduced as an instrument for us to gradually increase our equity base in the near term while preserving dividend yields for shareholders who prefer cash returns.

PROSPECTS FOR 2013

Global Economy

Although still fragile, the global economy is showing signs of recovery which is key to sustaining growth in Asia. ASEAN economies remain robust although there are downside risks from political events, inflationary pressures and liquidity flows

Regional Economies

Malaysia’s GDP forecast for 2013 is 5.5% (compared to 5.6% in 2012) with projects under the government’s Economic Transformation Programme expected to drive public and private investment, amid a mild recovery of exports. This expectation of course assumes no significant change to policy direction after the forthcoming General Elections.

The Singapore economy is expected to grow by 2.7% in 2013 (2012: 1.5%) in line with anticipated improvements in the external environment.

Indonesia could witness a 6.4% expansion in its economy (2012: 6.2%), a fourth consecutive year of over 6% growth, driven by domestic consumption and investments.

The Thai economy is expected to grow at a more moderate pace of 4.7% (2012: 6.4%) supported by domestic demand, fiscal spending and its export economy.

Overall we do not anticipate many changes in interest rates as central banks across the region balance inflationary pressure with growth priorities. However, we do expect regulators to be more proactive in interventions to deflate potential bubbles, especially in property prices and consumer loans. And, of course, in all markets regulators are expected to continue tightening banking regulations while at the same time show better support for cross border banking in line with the ASEAN Economic Community agenda.

STRATEGIES AND PRIORITIES

Our corporate theme for 2013 is ‘Network CIMB’ which is in the first instance, about understanding the full breadth and depth of CIMB Group. It is also about how we leverage on it fully and value our network properly. We have built a formidable banking platform, comprising a diverse mix of hugely talented people in our Group and operating capabilities in all key Asia Pacific markets. However, we can leverage our talent pool and capabilities better and key to this is how we connect our different units and entities and align everyone to shared objectives.

Our key strategies in 2013 will be centred on realising benefits from ‘CIMB 2.0’ and optimising ‘Network CIMB’. We will also be focusing on ways to improve our capital and cost ratios going forwards.

For consumer banking specifically, there will be better coordination across the region in 2013. We will develop more region wide products and services and improve our cross border value proposition to further substantiate our ‘ASEAN For You’ brand tagline. We will also accelerate e-banking strategies for each country with clear focus on markets such as Thailand and Singapore where we are sub-scale.

For CBTM, we will build on the strong momentum from 2012. We will search for more synergies within CBTM and also between CBTM and our other units, especially consumer banking and investment banking. IB will be very focused on making the CIMB legacy and RBS platform combine well and quickly deliver the revenues and better client value proposition that it promises.

CIMB Niaga will continue its multi pronged strategy focusing on fee based income and CASA accumulation while strengthening its capacity to win capital market deals. CIMB Singapore will remain on its current high growth trajectory as we continue to make inroads in the wholesale market and our consumer bank is set to make its maiden profit in 2013.

CIMB Thai will continue to build on the momentum it has in wholesale banking while embarking on new breakthrough strategies for retail banking. It is imperative that we get onto a clear sustainable growth path in Thailand because after many successful acquisitions under our belt, CIMB Thai is one where we remain unconvincing.

As always we will continue to strengthen our underlying operating platforms and support functions. Much attention will be on 1Platform Malaysia which is due to be launched in 1Q 2014, the new Risk Playbook and our various talent recruitment programmes. We will also search for more regionwide efficiencies in all our support divisions, including our General Counsel division to consolidate oversight of legal, secretarial and related units.

TARGETS FOR 2013

‘CIMB 2.0’ has strengthened competitiveness in both wholesale and consumer banking across the region. We have set our targets for 2013 based on our expectations of the operating environment, and a certain degree of optimism about what ‘CIMB 2.0’ can deliver. I would like to assure shareholders that we will continually evaluate these targets and are extremely conscious of both safeguarding and sustaining long-term value creation.

ACKNOWLEDGEMENTS

On behalf of the management of CIMB Group, I would like to express our thanks to our many stakeholders – customers, investors, governments in ASEAN and beyond, regulators, partners and friends for your unwavering support through 2012. My sincere gratitude also goes to our Board of Directors and members of our International Advisory Panel for their guidance and counsel in setting the strategic direction of the Group. My heartfelt thanks also goes to my 42,000 colleagues across the Group for their professionalism and enthusiasm and their commitment to CIMB Group’s vision to become the leading ASEAN company. Nazir Razak

2012 Top 20 Companies (by Market Capital) in Bursa Malaysia

SELLING PRESSURE: Most analysts maintain investment calls as banks’ stocks fall despite positive news

NEWS that Malayan Banking Bhd and CIMB Group would not be affected by new shareholding rules being proposed in Indonesia is “positive” for both banks, analysts said, but it did little to boost their stocks yesterday.

The stocks succumbed to selling pressure in the broader market amid fragile investor sentiment throughout the Asian region.

“I think, worries about Europe’s deepening crisis outweighed the good news for the two banks,” said an analyst from a foreign research firm.

It was reported late Thursday that Indonesia plans to limit single ownership in its banks to 40 per cent, but only for new investments.
The central bank’s deputy governor responsible for banking supervision, Halim Alamsyah, told analysts on a conference call that the new regulation would not be applied retroactively.

This means that Maybank and CIMB get to keep their controlling stakes in their respectivebanks in that country.

The news led Alliance Research to raise its call on CIMB to a “buy” from “neutral” as it removed the 10 per cent discount it had earlier placed on its valuation due to the shareholding
uncertainties in that country.

The research house also upped its target price for the stock by 50 sen to RM8.47.

The news is “highly positive” for CIMB given that its 96.9 per cent-owned CIMB Niaga contributes significantly to the group’s bottomline and is its key earnings driver, Alliance Research’s banking analyst Cheah King Yoong said.

CIMB Niaga accounted for about 32 per cent of CIMB’s pre-tax profit in the first quarter.

On the other hand, the new cap could deter local lenders RHB Capital Bhd and Affin Holdings Bhd from venturing into Indonesia.

Maybank shed 0.7 per cent to RM8.69 while CIMB eased 1.3 per cent to RM7.40 as the FBM KLCI fell along with most markets in the region.

The key index eased 0.5 per cent to 1,573.59 points. Affin was unchanged at RM3.07 while RHB Capital was down by 0.4 per cent to
RM7.40.

Cheah said the new shareholding cap is likely to deter foreign financial institutions from acquiring Indonesian banks, hence, from a longer term perspective, it may decelerate the anticipated competition in the Indonesia banking sector.

"This development is therefore expected to augur well for the foreign-owned incumbents such as CIMB Niaga. The announcement should also address the uncertainties surrounding the issue permanently, rather than Bank Indonesia leaving the issue hanging in the air by suspending its decision indefinitely back in December last year, in our opinion," Cheah, who is also Alliance's vice-president of equity research, said.

Other research houses did not change their calls on Maybank and CIMB.

"I believe the market had largely priced in the worst-case scenario for the two banks, believing that even if they had been affected by the new regulation, they would have been given ample time to sell down their stakes," said the earlier analyst.

Maybank owns 97 per cent of Bank Internasional Indonesia (BII), which accounts for under 5 per cent of the group's earnings.

Alliance Research and Hong Leong Investment Bank Research kept their "overweight" stance on the local banking sector, while RHB Research maintained a "neutral" after latest banking data showed that loans growth decelerated slightly to 12.1 per cent year-on-year in April, from 12.2 per cent in March.

Data showed that there was higher growth in the business segment in April while the household segment was marginally lower

From Business Times: Upbeat outlook on Maybank, CIMB

PETALING JAYA: CIMB Group Holdings Bhd's reach into the Asia-Pacific markets extended overnight following the acquisition of Royal Bank of Scotland's (RBS) cash equities and associated investment banking businesses for RM849.4mil.

 CIMB group chief executive Datuk Seri Nazir Razak said the acquisition provides an opportunity to complete the build-up of the bank's capabilities in Asia-Pacific markets, and do it quicker and less expensive compared with organic growth.

 “We have been very clear that our aspiration is to be a universal bank in Asean, and this requires strong connectivity and presence in key Asia-Pacific markets, and the connectivity needed means a significant investment banking presence beyond Asean,” he said at a press briefing.  He said the acquisition is an instant expansion of the bank's platform excluding Asean, which would enable the bank to expand into jurisdictions that the bank deems important.

CIMB Investment Bank Bhd CEO Datuk Charon Wardini Mokhzani (left) welcoming Kirby to the fold, with Nazir witnessing the occasion CIMB will pay RBS about RM431.8mil and inject a further RM417.6mil in new capital into various operating entities.

The country's second largest lender had just catapulted itself into Asia-Pacific territory in a big way with the acquisition while also maintaining and expanding its Asean operations, and emerging as the largest investment banking franchise based in Asia Pacific excluding Japan. RBS will pay CIMB about RM67.4mil, which would be used to defray the cost of running its former business for the first year.

 “It is a little bit unusual but those were the terms negotiated, where we negotiated to have them make a little bit of a contribution to help us through (the first year),” said Nazir. He also believes that the integrated CIMB-RBS platform would strengthen its value proposition to its existing customers in Asean, while also reaching substantial economies of scale in the stockbroking business, which involves high capital investments with low margins.

Most of the RBS units would be absorbed into CIMB's subsidiary, CIMB Securities International which was last known as GK Goh Securities that the bank acquired back in 2005. With the addition of the RBS units, CIMB will have new on-shore presence in Taiwan and Australia, as well as substantially enlarged operations in Hong Kong, India and China. However, besides its joint venture with Daishin Securities in South Korea, CIMB still lacks a presence in the republic, with RBS not willing to sell its Korean entities to the bank for strategic purposes.

 “In that respect, we need to then engage the Korean regulators to look at the possibilities of setting up CIMB operations in South Korea. We will be applying for a securities licence,” he said. CIMB would also review several joint ventures that RBS currently has with other parties, namely RBS Morgan and Hua Ying Securities, which RBS holds a 33.3% stake and 50% stake respectively.

 The bank also expects 350 to 400 existing RBS staff members to join the bank, with 82 out of the 94 key senior personnel accepting to join CIMB at press time. Leading the move to CIMB is the current RBS global banking Asia-Pacific head Matthew Kirby, who will assume the role of CIMB North Asia country head once the deal is completed.

 “We do not underestimate the new and unique management challenges that this acquisition brings to us. But, we can point to our proven and exceptional record in mergers and acquisition and our integration of banking and investment banking across Asean,” Nazir said. The acquisition would only add 1% to its current manpower, while geographically, he said the bank had no addition in terms of market, but increase in connectivity and presence in the Asia Pacific.

 In terms of financial impact, CIMB has assumed economic ownership since March 1, and expects to break even this year. “We will need a little bit of time to ramp up the business, and we hope to realise the cost and synergies in 2012, and break even or slightly negative in 2012, and after that positive,” he said. The bank expects the deal to be completed by November this year depending on the regulatory approvals and response needed

From: The Star Online

PETALING JAYA: CIMB Group Holdings Bhd, which is in talks to buy parts of Royal Bank of Scotland's (RBS) businesses in Asia-Pacific, may be looking to strengthen its presence in countries outside Asean.

Analysts, who continued to speculate over the move given the little that CIMB group chief executive Datuk Seri Nazir Razak had revealed about the deal, said the strengthening the Asean-focused bank's presence outside the region was the most probable strategy.

Nazir had said that the deal would be concluded by the end of next month. Analysts at Maybank Investment Bank Bhd and HwangDBS Vickers Research believed that the proposed acquisition would reinforce the bank's distribution channels given that the assets for sale were located in China, India and Hong Kong.

However, the bank's strategy could face obstacles even if the deal went through, as a Wall Street Journal blog pointed out early this month. This is because bankers unfamiliar with CIMB may choose to leave since they may feel that the bank is a relative unknown to some of their clients.

CIMB, through its investment-banking arm, has presence in Hong Kong while the bank bought a 19.99% stake in China's Bank of Yingkou Co Ltd in 2008 via a subscription of 141.2 million shares worth RM156.2mil.
The analysts said it was hard to comment on how the deal would impact the bank since there was very little information on exactly what assets were being acquired.

“Other than to strengthen the bank's distribution channels, I can think of no other reason because we don't know at this point what is being acquired,” Maybank analyst Desmond Chng told StarBiz.

Despite speculation since early February, there has been just one terse announcement to the stock exchange on March 1 confirming that the bank had signed a memorandum of understanding for the proposed acquisition of certain of RBS' cash equities, equity capital markets and corporate finance businesses. 

From The Star Newspaper CIMB looks beyond ASEAN 

Thursday February 16, 2012