This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

CIMB Group Holdings Bhd, the country’s second-largest banking group by assets, is close to acquiring KAF Investment Bank Bhd’s (KAF IB) stockbroking business, according to industry sources.

“The deal is pretty much confirmed. It’s just a matter of time,” a source told The Edge.

KAF IB CEO Rohaizad Ismail declined to comment, while CIMB said: “We don’t comment on market speculation or rumours.”

CIMB currently has a stockbroking business through CGS-CIMB Securities, its joint venture (JV) with China Galaxy Securities Co Ltd (CGS), one of China’s largest stockbrokers. However, it is widely known that CIMB and CGS will soon be ending their equity partnership as CGS is expected to exercise a call option to take full control of CGS-CIMB Securities.

It is understood that CIMB wants to acquire KAF IB’s stockbroking operations so that it will continue to have a domestic stockbroking business once it exits the JV. KAF IB’s stockbroking business is undertaken by its subsidiary, KAF Equities Sdn Bhd (formerly known as KAF-Seagroatt & Campbell Sdn Bhd), one of the oldest brokerages in the country.

Details of the upcoming deal, including the transaction value, are not immediately known.

Last September, CGS-CIMB Securities group CEO Carol Fong, who is based in Singapore, confirmed that CGS would be assuming full control of CGS-CIMB Securities. “By January next year (2023), it will be 100% owned by CGS,” she told The Edge Singapore (TES) at the time.

This has yet to happen, but sources indicate that the move is imminent.

Fong had previously said that CGS would continue to work closely with CIMB even after the split. “We are in the midst of finalising a collaboration agreement to govern our relationship going forward,” she told TES.

As it stands now, CIMB’s equity interest in CGS-CIMB Securities is about 25%, with CGS holding about 75%. Their JV is on two fronts — the regional stockbroking business and the Malaysian one.

Analysts whom The Edge spoke to say KAF IB is likely to be willing to sell its stockbroking business to raise funds and focus on its yet-to-be-launched digital bank. A KAF IB-led consortium was one of five recipients of a digital bank licence from Bank Negara Malaysia last year. The consortium includes car e-commerce platform Carsome and fintech firms MoneyMatch and Jirnexu.

Apart from stockbroking, KAF IB does investment banking, Islamic banking and fund management, among others. It also owns a research outfit, KAF Research Sdn Bhd, and an Indonesian stockbroker, PTKAF Sekuritas Indonesia.

KAF Equities slipped into the red in the financial year ended May 31, 2020 (FY2020), recording a net loss of RM700,000, but returned to the black with a net profit of RM5.62 million in FY2021, a company search on CTOS shows.

In FY2022, its net profit declined 98% year on year to RM111,000, even as revenue fell 43.3% to RM20.55 million, from RM36.25 million. Pre-tax profit declined 95.4% to RM303,000, from RM6.64 million.

The stockbroking business is an increasingly tough business to be in, given heightened competition and low margins. Analysts say CIMB probably wants to continue to have a stockbroking business for strategic reasons — it would complement its wealth management and investment banking businesses.

Of Malaysia’s eight banking groups, only Alliance Bank Malaysia Bhd — the smallest — is without a stockbroking business. It sold off the business last year, but continues to offer such services through partnerships with others.

Meanwhile, all eyes will be on CGS’ next move in relation to the JV with CIMB.

In January 2018, CIMB had formed a 50:50 JV with CGS to operate a regional stockbroking business. It was a prominent development at the time as it was the first foray by a Chinese stockbroker into Southeast Asia.

To facilitate the JV, CIMB sold a 50% stake in CIMB Securities International Pte Ltd (CSI) — under which all its stockbroking businesses outside of Malaysia was parked — to CGS for S$167 million. The price represented a multiple of 1.3 times CSI’s consolidated net asset value of S$256.9 million as at end-2015. The JV had included built-in mechanisms to alter the shareholding of the parties via call or put options.

Later, in July 2019, CIMB and CGS officially set up their Malaysian stockbroking JV, also on a 50:50 basis.

In December 2021, CGS exercised a call option to increase its shareholding in the JVs by about 25%. With that, CIMB’s interest in the regional and local JVs fell to 25.01% and 25% respectively, while CGS’ interest correspondingly increased to 74.99% and 75% respectively. CIMB, in a statement announcing the exercise at the time, did not disclose the disposal price.

CGS-CIMB Securities’ Fong said last year that she aimed for the company to be public listed by 2025.

CIMB, whose share price has gained 0.3% over the last 12 months, closed at RM5.40 last Friday, giving the company a market capitalisation of RM57.59 billion. It made a net profit of RM4.11 billion in the first nine months of the financial year ended Dec 31, 2022, up 20% y-o-y from RM3.44 billion. CIMB is expected to release its full-year financial results later this month.

As for KAF IB, it reported a net profit of RM52.46 million for the year ended May 31, 2022 (FY2022), down 68.5% y-o-y from RM166.37 million. For the first half of the current financial year (1HFY2023), its net profit stood at RM78.6 million, more than double the RM35.14 million in 1HFY2022.

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