CIMB Group Holdings Bhd
(Feb 2, RM7.25)
Maintain buy with a higher target price (TP) of RM 7.70: CIMB Group Holdings Bhd recently held a meeting with analysts ahead of its close period for fourth quarter financial year 2017 (4QFY17) results (due in February). We do not expect any major surprise from the upcoming 4QFY17 results. Key Performance Indicators (KPIs) are likely to be in line with FY17 guidance except for loan growth that is likely to fall short. Based on the meeting, we believe CIMB’s worst is behind them, especially for its wholly-owned subsidiaries CIMB Niaga and CIMB Thai. The CIMB Group management shared that the expectations of stronger corporate loans in 4Q17 did not materialise, however the pipeline remains good. This was contributed across the board while demand for retail loan remains positive, fuelled by residential mortgage loan. All in, management reiterated of subdued loan growth in 4Q17.
Having deteriorated by 11 basis points (bps) quarter-on-quarter (q-o-q) in the 3Q17, the management expects net interest margin (NIM) compression from CIMB Niaga to again drag CIMB’s overall NIM. However, we feel that the compression won’t severely impact its overall NIM in FY17.
In FY18, the management views that NIM will continue to compress at a slow pace but this will be partially offset by the recent overnight policy rate (OPR) hike and higher NIM at CIMB Thai. CIMB sees that capital market activities (debt and equity) have picked up since 3Q17 which should translate into higher non-interest income (NOII) in FY17. There was no upset in CIMB Niaga’s credit cost. We believe credit cost of 60bps to 65bps on a group level remains achievable. Additionally, there was no significant sign of weakness in residential and commercial property in the Malaysia operation.
The management is still guiding a 50bps impact on capital ratio with the utilisation of regulatory reserve. However, if Bank Negara Malaysia changes its stance on the regulatory reserve usage, the management expects an additional 15bps to 20bps impact to capital.
CIMB is poised to report further earnings improvement in the upcoming 4QFY17. We remain optimistic about CIMB’s recovery owing to its T18 (Target 18) initiatives that will further drive its return on equity (ROE) recovery.
We are lowering our cost of equity (COE) to 10% (from 11% previously) to reflect its robust and higher NIM at CIMB Thai. CIMB sees that capital market activities (debt and equity) have picked up since 3Q17 which should translate into higher NOII in FY17. We are lowering our cost of equity (COE) to 10% (from 11% previously) to reflect its robust earnings growth and ROE recovery. Correspondingly, our TP is raised to RM7.70 (from RM7.25). Our TP was derived from COE of 10% and ROE of 10%. Maintain “buy”.— HLIB Research, Feb 2
Source: The Edge