SC's Recommendations

My comments in colour.

The Securities Commission's (SC) recommendation for listed firms to disclose their financial reports on a half-yearly basis, instead of quarterly, drew mixed reactions yesterday.

Those for the move said it is about time Malaysia moves in that direction as quarterly reporting tends to promote short-term views.

They also believe that with companies under pressure to show good numbers on a frequent basis, there could be temptation to tweak the results. As it stands, quarterly results need not be audited by an external auditor.

Those against the move, however, said they prefer having the reports as frequently as possible, especially in uncertain economic times as it helps investors make better investment decisions.

Tan Sri Krishnan Tan, executive deputy chairman of IJM Corp Bhd, said it is becoming "absurd" to put out financial reports every quarter as it isn't a fair reflection of how the company may be doing.

"It doesn't have a lot of meaning ... let's just go for half-year and year-end reporting," he said at a panel discussion on the SC's five-year Corporate Governance (CG) Blueprint, which was launched here yesterday.

The plan for half-yearly reporting was included in the blueprint, along with another, to shorten the timeframe for companies to submit their financial reports.

Currently, companies have to disclose their quarterly financial reports within two months from the end of every financial quarter.

Malaysia first introduced quarterly reporting in 1999 to bring back investor confidence in the aftermath of the Asian financial crisis.



Over the years, however, the merits of quarterly reporting have been debated, with some arguing that a quarter may not be long enough a period to draw a conclusion about a company's financial position or performance.

"While quarterly reporting had been useful in terms of restoring investor confidence ... a comprehensive review will be undertaken on the periodic submission of financial reports, with a focus on whether to retain the current practice of quar-terly reporting," SC chairman Tan Sri Zarinah Anwar said.

Countries like the UK, Australia, New Zealand and Hong Kong require their companies to report on a half-yearly basis.

Raymond Tang, chief investment officer of fund management firm CIMB-Principal Asset Management Bhd, thinks it is a good move to do away with quarterly reporting as firms will have more time "to run their business" rather than "scramble" to put out reports.

"It will also allow fund managers and analysts more time to go and meet the company (management) to do their analysis ... a lot of times, they have to wait because of the blackout period (during which the company can't talk until the results are out)," he remarked.

He suggested that companies hold quarterly briefings to give investors a "snapshot" on how they are doing, rather than issue financial reports.



(Yes, quarterly reporting yields more cons than pros. QR causes analysts to over-concentrate on the matter of earnings estimates on a quarter to quarter basis, which paralyses many trying to adopt a more cohesive appreciation of how a company is strategising itself in the shape industry evolvements.

To even put an estimate on quarterly figures is already too limiting to offer a proper perspective. You can do a q-on-q trend which in itself may say something but not much. You will have q-on-q that says up, then flat, then up then down ... what would you comment on that. A better analysis may be year-on-year quarterly comparisons, which is looking at say Q2 2011 and comparing to Q2 2010, that would strip out seasonal effects - still its looking at a lot of silly numbers that is akin to grabbing a handful of sand from a large pail.

You get the accounting staff rushing from one quarter to another, trying to make the deadlines. Its a lot of wasted resources. Accounting function should be used in a more proactive way, rather than just tabulation of figures. A forward looking company should use accounting to look at various products / units on how they have used capital to generate returns, as an example. Other proactive usage of accounting may include looking at the way taxes could be minimised; looking at how reserves could be utilised properly; reworking the balance sheet for corporate exercises; setting stretch KPIs relevant for each product or unit; advising on tax / dividends / bonus / reserves / treasury shares / buyback policies / dividend policies / short and long term liabilities strategy / hedging of exposures / etc. To do quarterlies certainly takes away at least 1/3 of the resources of any accounting function of a listed firm.

In bigger capitalised markets such as the US, the hedge funds are very keen to promote QR because they need every advantage they can get to sell short or go long for a quick trade. Do we need to help promote that kind of trading activity? GE was famous for once having no down quarters for years - i.e. every quarter's profit was higher than the previous. What that means to me is a lot of effort would have gone into "earnings management" or massaging earnings from quarter to quarter to smooth out an uptrend, under reporting some and forward reporting some to achieve whatever picture you want. We all know that is not a good practice, over the long term.

What RULES and REGULATIONS we promote, will affect how companies react to those rules and regulations. If you continue to have QR, then they will have to do QR. Remove that, then they do not have to worry so much about taking a big investing decision which may hit some quarter's results but is beneficial for the longer term. They may also take a less aggressive approach to hedge stuff so as to not be hit excessively by volatility in commodities or currencies).



Meanwhile, there didn't seem to be much industry support for an SC suggestion that companies take less time to submit their financial reports, a move meant to ensure that investors receive critical information in a timely manner.

Currently, the timeframe for the submission of quarterly and annual reports is two and six months respectively.

Zarinah said the best practice time frame in other markets is 45 days and two months, respectively.

(The current 2 and 6 months is way outdated and does not provide a quick enough turnaround for investors to assess the information. What we have are largely outdated and unusable. I would suggest that QR be done away, and just have half yearlies and annuals. The submission time should be just 30 days and 2 months respectively. 30 days seemed more of a stretch for some companies, but seriously, the benchmarks we set says a lot about how we want the listed companies to perform. Its like telling an 18 year old that if he can run 100m in 18 seconds, he is good. But if you set it at 16 seconds, he will probably get there as well.

30 days is not a number plucked out of nowhere. Top companies have always boasted that they can CLOSE THEIR ACCOUNTS and get the final tabulations within 2-3 days. Can any of our listed companies do that? Why not?

Because there hasn't been a push for it. I know for a fact that there are a few locally listed companies that can do that, and they are superior performers. Why would you wnat to do that? If you can close your books and get tabulations within 2-3 days, it literally means that:
a) you have a well planned and timely reporting schedule that every unit adheres to religiously
b) it shows how much the CEO/CFO places importance on financial numbers tracking, those tracking them closely are not kiasu but are diligent as they want to spot "issues" or "problems" before they escalate
c) top management has a high degree of respect, reliance on financials and would also impart measures to instill checks and balances so that the figures are also filled with integrity and transparency

The whole thing about financial reporting and management goes down the line, and all employees would be shaped to respect the integrity and importance of coming up with those figures).



"I think it will be a challenge ... not all companies are financial institutions that do balancing every day. Also, there will be enormous pressure on auditors (who will have to audit the annual accounts)," IJM's Tan said.

Datuk Johan Raslan, executive chairman of PricewaterhouseCoopers Malaysia, agreed that it would put tremendous pressure on auditors, especially given the brain-drain situation in the accounting industry in Malaysia.

(I don't think there is a lack of accountants in the country. There may be too many greedy accounting partners at the top, inhibiting the payscale for graduates and senior accountants. I think the industry can pass on any additional cost of higher wages, its not that debilitating. The partners should worry less about not getting their RM2-3m annual pay and profit share packages. I believe there is too much fat at the top at the expense of the cogs and wheels of our accounting industry. Any partners want to reveal their pay packages and try to convince the rest that they are not being greedy???).

More and more Malaysian accountants are leaving the country to work in neighbouring countries that pay better, he said. This essentially leaves less people to do more work.

"I would recommend that we stick to the current regime until we have sorted out the level of the income for accountants and the brain-drain issue," he said, when met at the launch.

Zarinah, meanwhile, assured that the SC would not implement this without first listening to industry feedback.

Read more: SC proposal draws mixed reactions http://www.btimes.com.my/Current_News/BTIMES/articles/bluep/Article/index_html#ixzz1RiWias3T

Assessing Risk and Response

How to assess the events unfolding, especially in Libya? The delay in global response will cause more uncertainty and turmoil in the markets. Hence, the recent jump in urgency by global powers on the situation is a very good thing.

The UN Secretary-General Ban Ki-moon on Wednesday approved a statement reached by the UN Security Council members that condemned the use of force against civilians in Libya.

BAN KI-MOON, UN SECRETARY-GENERAL:
"The situation is developing rapidly, toward a very dangerous situation. Therefore， we need to very carefully monitor the situation. I will continue to urge, in the strongest possible terms, first to stop violence, to protect human rights and the civilian population.“ Ban also called on Libyan authorities to address the demands of the Libyan people.

The U.S. President Barack Obama described the violence in Libya as "outrageous" and "unacceptable".

BARACK OBAMA, US PRESIDENT:
"I've also asked my administration to prepare the full range of options that we have to respond to this crisis. This includes those actions we may take and those we will coordinate with our allies and partners or those that we'll carry out through multilateral institutions."

Meanwhile, governments around the world are sending planes and ships to evacuate their citizens from Libya.

Fears for the safety of foreigners were heightened after a Turkish worker was shot dead in a construction site near the capital Tripoli on Wednesday. Turkey, European Union states, the U.S. and China, among other countries, are picking up their citizens stranded in Libya by air and sea.

The spreading violence in Libya has also caused anxiety in markets. The U.S. crude oil price briefly crossed 100 dollars a barrel on Wednesday, hitting the triple digits for the first time since October 2008. Reports say one-fourth of Libya's oil producing capacity has been affected. Oil firms operating in Libya are suspending production and evacuating workers. Investors, fearing that higher energy prices will hit corporate profits, also avoided stocks. The price of gold, a traditional safe haven in times of trouble, also soared.

: Marsha Londoh/CD Album

We should expect a greater concerted effort in terms of embargo from major countries to put pressure on Libya. The more actions are taken, only then would we see pushing the events to some sort of conclusion.

What is interesting is the level where VIX is at over the last few days. While it did jump to 24 from a benign 16, it did not scale further. In fact it very quickly dip back to 20, which is not a serious risk aversion thing. This points to the fact that not many are scrambling to hedge their long positions, which also translate to the fact that investors are generally willing to go long or buy more, and not the other way around. The way VIX traded would tell me that we are in for a very short period of down days. The way the VIX traded would tell me that we are in for a speedy resolution in Libya. My thinking is that Gadaffi should be out very soon, I think the delay is him negotiating his exile terms (i.e. not to be persecuted and be left with his millions or billions in peace) ... hah ...

Gold is steady and higher. To me the commodity is way over-owned at levels above 1,400. Smart money should be halving their gold holdings now. Its only logical, we need to ask ourselves, is Libyan crisis affecting the price of oil - the answer is yes. If that is a yes, will the US and/or Europe going to allow their feeble economies to be drastically affected by that? You know the answer to that as well. Hence, be it Obama or Bush, the US will one way or another ensure that the Libyan oil wells keep functioning, or else.





Warren Buffett is going long on America, and investors are likely to take note when markets open on Monday. Buffett's annual letter, released Saturday, is brimming with references to the strength of the American people, economy and spirit. Investors said they were struck by how confident the letter was, particularly in comparison to his annual missives of recent years.

"Money will always flow toward opportunity, and there is an abundance of that in America," said Buffett, who has run Omaha, Nebraska-based Berkshire Hathaway since 1965 and is now one of the world's richest men.

"The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential ... remains alive and effective."

He also forecast a recovery in the housing market "within a year or so" and that "America's best days lie ahead."

Given that Buffett owns the entirety or a large share of the country's largest railroads, insurers, banks, consumer products makers and distributors, his optimism could be seen as an endorsement of the economy in 2011 and beyond.

I have laid out what I consider to be prime factors in assessing risk at the present time, you do your own conclusions.

Nazir Razak's Interview

Nazir Razak, in my view, one of the top 10 CEOs Malaysia has ever produced in the past 50 years, was awarded the prestigious Lifetime Achievement Award by FinanceAsia for his contribution to Asian banking and finance. What makes a good CEO? If you trace the history of CIMB and Bank Bumiputra, you will appreciate the fact that he has put in plans to move the group continuously up the value chain by creating innovative products, taking calculated risks, drive at a meticulous utilisation of capital and enforcing strict minimum returns on operations. The culture and mindset is very progressive, he convinced the board of the need to pay for top talent and to reward them greatly when they perform.

Critics will say that the group has nurtured strong ties with the government to be the first in line for first bite at any cherries - but they still had to nudge Maybank aside. Investment banking is not based on ties alone, you have to think "value-driven", "value-add" and persuasive strategic motives, and add to that a strong network of international banks to raise funds instantaneously when needed. Cultivating ties is highly essential in banking, you must have the ability to knock on the doors of Khazanah, EPF, PNB EPU, etc... but in the end, you must also deliver something of value. Can other banks do it? Well, many give up even before they started, just look at most of the local banks, they don't even have a decent investment banking unit, so don't go around to say Bank Bumi Commerce is a favoured animal because you all have not put up any decent team or has any inkling what investment banking is all about.

In terms of market cap, it has just pulled away from Public Bank and is now just a few billion ringgit away from overtaking Maybank. To me, Bank Bumi Commerce will be the country's biggest bank within a year and will continue to stretch the margin over its competition - why, because of "the path" it has set itself on. Some may quibble on the highish valuations, but that's a deserved premium when you consider the assets, its market positioning, the staff and "the path".

The next challenges on his plate:
- is to ensure their foreign acquisitions maintain that standard, execution ability and deliverables
- grow the branding, penetration and market acceptance in retail banking
- it has established a good lead in Islamic banking and finance, now is the time to leverage and extend that lead, esp in sukuk and shariah funds management
- cultivate to be a premier force in local property lending and refinancing markets
- work through a cohesive strategy with Khazanah, PNB and EPF to increase the free float of listed GLCs
- look deeply into securitisation, get the central banks in Malaysia and Indonesia to be on the same page
- further elevate the research standards with a view on timeliness, effectiveness, results-oriented and out-of-box thinking on strategic issues
- there is still enormous opportunity in structured put and call warrants, think not just the top 30 companies, but overseas majors and indices including commodities, forget about basket warrants (they are difficult to follow and value)
- look at being a substantive distributor and placement agent for major Asian IPOs from China and Indonesia in particular, start cultivating strong ties

Below was the insightful interview with FinanceAsia.

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What has been the key to CIMB's positive financial performance over the past year?
I think the performance has been pretty consistent with the rest of Malaysian banks. This is fairly surprising to some people, as we have a fairly large business involving capital markets and indeed we are the most active in the global financial markets. We were able to achieve this in part because in 2008, the turnaround of our consumer banking business actually came through and therefore that was able to offset the 35% decline that we saw in our capital markets business. At the same time, we took rather big steps with regard to our counterparty risk positions and also managed our liquidity very prudently and so this helped insulate the firm from many of the global shocks.

What was the most challenging decision you faced during that period?
Actually, the most challenging decision I faced was whether to proceed with the acquisitions we had embarked on during that period. If you looked around in the region and elsewhere at the time, people were reneging on deals left, right and centre. And there were times when some people thought that finance was going to fall off the cliff. So it was quite hairy as we had M$5 billion ($1.4 billion) worth of acquisitions on the plate. We had to look at it all very carefully, steady ourselves and believe in our view, which is that this is for the long term and we can still create value even though valuations were off, relatively speaking.

What was the original motivation behind the strategy of acquiring more banks and becoming a regional player?
In the early part of 2004 we were a liquid, Malaysian investment bank that had 30%-40% market share, and when we looked ahead we were wondering where to go to grow? So we decided we had to look around regionally. And then we made this rather dramatic acquisition of GK Goh. Then we started looking around even more in the region and quickly we realised we were not going to get very far without a bigger balance sheet. At the same time, I looked at the way accounting was going -- mark-to-market accounting, etcetera -- where accountants lost their prudence and basically decided to go with anything that smoothed out earnings. That made it very difficult to be a listed pure investment bank. And the third thing that came into play was a convergence of interests. The GRC [governance, risk management and compliance] reform in Malaysia was just beginning, and the new Khazanah [the investment holding arm of the government] mandate came into play -- they were encouraging companies to re-energise themselves [and merge]. So we had a sister bank, Bumiputra Commerce Bank, that was in dire straits. There was a convergence of interests. The holding company of BCB hired McKinsey and asked them what to do. And when they came to me and asked me what I thought, I said to them, 'Look, for the first time as consultants you are actually going to get a solution. This is the solution. We merge the investment bank and the commercial bank and I will run it.' In the past, there had been overtures for me to just cross over and go run the commercial bank but I thought that lacked scale. The best thing to do was to merge the two entities, to merge the people. And all that came together in 2005. From a larger perspective this was also about economies of scale. I think a commercial bank needs a regional-level scale. We feel the right position for us is to be between mindlessly global and hopelessly local. And I think we've found that position.

How difficult is it to manage the transition from being a Malaysian bank to a regional player?
In some ways it is actually easier for us. Think about it -- is it easier for me to go to Indonesia or for a global bank to go to Indonesia? And in terms of solutions that we offer, do I understand the requirements of say the development of a rupiah-bond market better than a global bank, given the Malaysian experience in the region? I do. You must also remember that when we go into these markets we try very hard to make sure that it is not just CIMB, but rather it is a combination of CIMB and a local franchise coming together. As a result, people see us as local. If you go to Indonesia they see us as the old Bank Niaga franchise plus CIMB. If you go to Thailand they see us as the old Bank Thai guys plus CIMB. And even in Singapore they see us as the old GK Goh franchise plus us. In a way, we want to be seen as a local brand.

I do remember when you were making some of those early acquisitions a lot of people said: 'This isn't going to work'. Were your investors among those critics or were they on board from the beginning?
They weren't all onboard. When the group first entered Indonesia in 2002 the stock got panned and we lost about 25% in value when we announced the acquisition of Bank Niaga. Keep in mind this was at a time when some people thought Indonesia was in bad shape. We were the first -- and only -- people who bid for Bank Niaga. At the time the feeling was: 'Why are you going into Indonesia? Do you know what you're getting into?' So on and so forth... But since then we have proven that we can do business in Indonesia, and indeed in general, that we can do business abroad. But you know we have been very careful about winning investor confidence. One of the things we do is that every time we do a transaction we take investors through, in quite a lot of detail, every step of what we plan to do and why we think this is a good transaction. We actually show the books and explain the synergies.

What's the importance of Asean as a region and how has that changed with China's growing economic and political power?
I think, in many respects, we are a microcosm of what Asean is all about. I think the individual Southeast Asian countries on their own will struggle unless they come together as an asset class and as an economy. I see a lot of upside, specifically with intra-Southeast Asian trade and travel, if we come together. So we have to come together from the external perspective, if you like, because when investors look across their options they need the size and potential of a 600 million population investment choice. And then you have China. Asean has a lot to offer in the new global landscape given our proximity and connections to China. And I think we are very comfortable with that point. When [Ming Dynasty admiral] Cheng Ho came to Malaysia he dropped off a princess for our royalty to marry in view of building relationships. When the Portuguese came we got invaded. We prefer the Chinese approach.

What is CIMB's strategy in China? I know you already have a presence there.
I think it's going to be very step-by-step. We see ourselves first as a regional bank, but you have to have some operations in China. We have to facilitate our companies that are investing in and doing business with China. And the ability to do that is strengthened when you have some presence in China. So our first step, is a very tentative step, it is a small investment in a bank in Yingkou [in Northern China]. First we will see how we do and then we will go back to our shareholders and let them know how we want to move forward longer-term.

There is a view that Malaysia is still overbanked. As banking sector libereralisation opens Asean markets to foreign rivals, how well placed is CIMB to compete?
We've seen different stages of liberalisation over the years. If you play it right, liberalisation is always an opportunity for stronger banks to become even stronger. When we were an investment bank we saw the liberalisation of that industry actually strengthened us, while the smaller, more marginal players struggled to survive. I think in [commercial] banking it won't be dissimilar, I don't disagree that we are overbanked. I don't know what the right number [of banks] is, perhaps five or six, rather than the nine today. For us, our strategy is to become very regional so I don't think we're going to play a big part in any consolidation.

How important, longer term, is investment banking to CIMB group?
You know we are very strong believers, despite what some people say today about the concept, in the universal banking model. I think there are very strong synergies between capital markets, treasury and retail. At the heart of the franchise is just this -- this model, which is very powerful. But it is very tough to manage. From the beginning I've always said it's all about the ability to manage both traders and tellers in one organisation. Can you get them to talk together and work together? In that regard, we think it is very important to be strong in both areas.

What has to happen, or at what point do you think you will have achieved your vision of CIMB?
In 1996 we had a clear vision of what we wanted to be. We announced a mission statement that we wanted to be the No. 1 investment bank in Malaysia. In many respects that was achieved and that is why we have had to move on. Now, that vision statement is to lead in regional universal banking in Southeast Asia. We are far from it. To be there, we would have to be really seen, in terms of earnings, in terms of customers' attitude, in terms of shareholder composition, as a truly regional bank. Today, yes, we have the best regional platform but we are still predominantly a Malaysian bank. The transformation will take several years, but it will happen. I am on the record as having said that by 2015 Indonesia will make up a bigger component of our business than Malaysia. But we also want to be seen -- be it by the international investor or the Thais or the Filipinos -- as a truly Southeast Asian franchise.

The global banks have been badly shaken by the financial crisis, but Asia's banks have been relatively unscathed. Was this a result of good luck or good judgment, or both?
I don't know whether you describe it as luck or judgment but a lot of it is because Malaysian banks and regulators learnt very hard lessons during the Asian financial crisis. I know some people say we caused this current crisis because we all started saving like hell -- but if you look at the way we are regulated we are all clearly operating based on a very strong memory of what happened. And today, I don't think a couple of weeks can go by without Bank Negara speaking to Bank of Thailand or Bank Indonesia about CIMB -- and I think years go by without the Fed speaking to the state regulators in Europe.

We have seen the consequences of poor oversight and regulation of the financial services industry in the developed market. What lessons do you think this current financial crisis presents for banking industry reform in Asia?
If the global financial crisis had happened say five years later, the damage in Asia would have been worse. I think it is for us, at the very least a sanity check. For the world, it is forcing a very hard look at finding out what is the right way of banking. But one of the difficulties is, we obviously have to agree on what were the causes of the crisis and move on from there. Yes, there were causes that were outside banking per se, but there has also been under-regulation of global banking. There has been the issue of globalised networks that are governed by a wide variety of domestic and local regulation. That doesn't work. But yet, can anyone really see a global regulator? How do we deal with this? But it's absolutely required that we do deal with this. If you look at the leverage or arbitrage that was going on, it was incredible. I can't for the life of me understand how banks were 50 to 60 times leveraged. But they were able to do it because they were regulated in one country and leveraged in other markets and their primary regulator didn't know about it and couldn't see it quite clearly. All this has to be dealt with, otherwise this crisis will happen again.


p/s photos: Marsha Milan Londoh