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In March, RBS signed a memorandum of understanding for the sale of its cash equities, ECM and corporate finance businesses in Asia. It was signed not with a western multinational, nor an Australian like Macquarie, but with Malaysia’s CIMB.
It’s nothing new that CIMB, like DBS further south in Singapore, is keen on regional expansion; over the years it has bought Singaporean broker GK Goh, Indonesia’s Bank Niaga, and most of Thailand’s SICCO Securities, and is in discussions to take a stake in Bank of Commerce in the Philippines. In our January edition, deputy CEO Charon Wardini Mokhzani spoke at length of the bank’s ambitions within Asean.
But there’s something symbolic in a local player taking on an entire regional suite of operations from a UK bank that has accepted it can’t make a sustainable business out of them. CIMB won’t yet comment on exactly what they’re negotiating to buy, but it appears to include investment banking, institutional and retail equities in Australia, Malaysia, Thailand, India, Hong Kong, China and Taiwan, plus global equities distribution reaching as far as Europe and North America. (It is understood that CIMB has passed on the Korean, Indonesian and Singaporean businesses that were also on sale, feeling it either already has the capability or doesn’t want it.) If it goes through, this is a transformational transaction not just for CIMB but for the reach of emerging market banks.
That’s not to say that it will necessarily work. RBS is getting out of these businesses for a reason: as Asia CEO John McCormick explains in our investment banking feature in this edition, equity businesses are expensive to run, don’t necessarily make much profit, and are exceptionally difficult to build into a top 10 franchise. It is barely a month since Samsung Securities, which some people believe has spent as much as $100 million on building a regional investment banking business out of Hong Kong, all but shut it down again after just 10 months.
But CIMB is not alone in believing that the way forward is a regional business exploiting synergies between multiple markets. In fact, it’s not even alone in Malaysia in thinking this way: last year Maybank bought Kim Eng Holdings, the Singapore-based regional brokerage, and has announced plans to grow its assets under management tenfold by 2015.
For these banks to be able to make their acquisitions work, it’s not so much a question of matching the league table standing of the multinationals, as having a cost base that will be sustainable. That may be challenging for CIMB, whose previous acquisitions have been of Asian enterprises with broadly similar cost structures to their own; while no slouch in the pay stakes, it is unlikely to have been paying the equivalent of western bulge-bracket ECM banker remuneration.
It’s also a deal that takes CIMB somewhat out of its Asean comfort zone. The most interesting place to watch will be Australia, which is where RBS had enjoyed the greatest success as an ECM house, ranking as high as fourth locally. On the plus side, any investment into Australia puts the bank closer to the vast pool of more than US$1 trillion of superannuation (pension) wealth, one of the largest pension fund sectors in the world, and a body of capital that needs diversification overseas, particularly to Asia. On the minus side, this will be the biggest cultural challenge CIMB faces in bedding in its new businesses.
The other interesting element about this deal is that it shows a trend many people have been waiting to see: cashed-up Asian businesses with balance sheet strength seeking to acquire distressed assets in the west. Nomura was clearly an example of this, but Japan is rather a separate case; a bank from an emerging market grabbing sell-off assets from a troubled western institution is different. It’s interesting that of the three final bidders for the RBS assets, two were from emerging markets, the other being CICC (the third, Scotia Bank, was attempting to link its mining businesses with the opportunity in China and elsewhere in Asia). With a sense of the European debt crisis having levelled, but with European banks still needing to sell assets to boost capital, we should expect to see more of these deals. The ways local banks take advantage of this moment of relative strength will define how banking in this region looks for many years to come.
