This article first appeared in The Edge Financial Daily on June 1, 2018
CIMB Group Holdings Bhd
(May 31, RM5.90)
Upgrade to buy with a higher target price (TP) of RM7.50: CIMB Group Holdings Bhd’s first quarter of financial year 2018 (1QFY18) net earnings were up 10.6% year-on-year (y-o-y), while on a normalised basis it was 2.1% lower y-o-y. CIMB’s annualised core net profit was within our expectations but 10.4% below the consensus estimate (which in our view was overly optimistic). There was not much excitement in the 1QFY18 results, with the key driver being lower provisions (credit cost down to 49 basis points [bps] in 1QFY18 from 52bps in 1QFY17) while deconsolidation of CIMB Securities International’s contribution resulted in an improved cost-to-income ratio (CIR) of 49.8% in 1QFY18 versus 52.6% in 1QFY17, in line with management’s T18 target of <50%. We raise our TP from RM7.30 to RM7.50 (based on 1.38 times price-to-book value [P/BV] target) as we shift our valuation to 2019 estimate (CY19E), and upgrade our rating from “hold” to “buy” on valuation.
CIMB reported 1QFY18 net earnings of RM1.3 billion (+25.6% y-o-y); core net profit of RM1.15 billion (-2.3% y-o-y) was in line with our estimate but below consensus. 1QFY18 operating income declined by 1.3% y-o-y as fund-based income was weak (-3.5% y-o-y), impacted by weaker wholesale and commercial banking activities, though consumer banking remained the key driver. The positive net interest margin (NIM) expansion of 4bps quarter-on-quarter (q-o-q) in 1QFY18 to 2.57% may not hold in the coming quarters due to margin pressure from Indonesia, though the 25bps rate hike announced on Wednesday may provide some relief. Meanwhile, the stronger 1QFY18 pre-tax profit of RM1.74 billion (+8% y-o-y; +13.5% q-o-q) was driven by lower impaired loan allowances, with net credit cost down to 49bps from 52bps in 1QFY17 and 71bps in 4QFY17.
The adoption of Malaysia Financial Reporting Standard (MFRS) 9 had a manageable impact of -70bps on the common equity tier 1 (CET1) ratio on Day-1 (down from 12.2% in December 2017 to 11.5% on Jan 1, 2018), but it has edged up to 11.7% by March 31, 2018.
We upgrade CIMB from “hold” to “buy” as the stock is currently trading at a steep 21% discount to our revised TP of RM7.50, based on an unchanged P/BV target of 1.38 times on the CY19E book value per share (rolled forward from CY18E; underlying assumptions for 2019 of 9.8% return on equity and 8.4% cost of equity). For 2018, our key assumptions include loan growth at 4% y-o-y, NIM at 2.5%, credit cost at 57bps and a CIR of 49%. Downside risks are NIM pressure, and deterioration in asset quality. — Affin Hwang Capital Research, May 31