Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

CIMB may be too small to aspire to be the world's local bank, the position HSBC used to claim for itself in the pre-Stuart Gulliver days. Nothing can stop the Malaysian lender from mimicking the strategy on a more modest scale: by seeking a presence in each of the 10 countries that make up the Association of Southeast Nations, or Asean. Nothing, that is, except Indonesia. 

Debt Hangover
Malaysia's No. 2 lender underperforms the index
Source: Bloomberg

To see how Southeast Asia's biggest economy is undermining CIMB's ambitions, consider the regional banking group's latest earnings report. In the nine months through September, CIMB's profit before tax from Indonesia slumped by almost 68 percent from a year earlier, the lender said in a presentation to analysts on Wednesday. With the country accounting for almost a third of the group's net interest income last year, it's easy to understand why the stock has lagged behind the benchmark index over the past several months.

Indonesia's economy used to reward banks with the highest profit margins on loans anywhere in Asia; now it's slapping them with some of the ugliest credit losses. Had it not been for a sale of its soured loans to the coal industry, CIMB Niaga, the Indonesian unit, would have had to report a non-performing loan ratio of 6.7 percent, according to a Maybank research note. The worst may still not be over. For the companies in the Jakarta Composite Index, net debt to Ebitda, a measure of their debt-servicing burden, is at almost a nine-year high:

Overburdened Companies
Indonesia's net debt to Ebitda ratio is stubbornly high
Source: Bloomberg

Until Indonesia's corporate profitability shows signs of repair, it's hard to see CIMB making good on its promise to ratchet up its return on equity to 15 percent by the end of 2018, from 8.8 percent now. And if that commitment is broken, it will be hard for Chief Executive Officer Zafrul Abdul Aziz to justify expansion in the three Asean markets where the bank is still absent -- the Philippines, Myanmar and Vietnam.

CIMB's ambition to bulk up its balance sheet has already received one setback. A three-way merger between itself, RHB Capital and Malaysia Building Society fell through earlier this year. Just as investors never really warmed to that deal, they'll be watching the bank's expansion plans in Southeast Asia with trepidation. After all, none of the bank's key offshore markets -- Indonesia, Singapore and Thailand -- is witnessing rapid GDP growth, and all of them have a debt overhang. Thailand is now on the mend, and a revival in Singapore's property market next year may lift the prospects for the city-state's mortgage lenders.

The joker in the pack, however, is Indonesia, whose outsize dependence on commodities means it can still spring some nasty surprises. Rather than hanker after empire-building, this might be the time for CIMB to hunker down and focus on return on equity.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net