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This article first appeared in The Edge Financial Daily on July 3, 2018

CIMB Group Holdings Bhd
(July 2, RM5.41)
Maintain buy with an unchanged target price of RM7.40:
CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak, the face behind the country’s second largest lender, may leave the banking group. A source said Nazir had informed CIMB’s board of directors that he will not be seeking a re-election as the chairman of the banking group and will leave when his term finishes next August. While there is talk that Nazir could leave earlier than August, the source said that so far, there has been no indication of him being “told to go”. “He has not been called in by the Council of Eminent Persons (CEP) or anyone else,” said the source. According to The Star, CEP chairman Tun Daim Zainuddin has said that it is entirely up to Nazir whether he chooses to retire early or to see through his contract terms.

Nazir’s potential resignation or intention not to seek re-election as the chairman is unlikely to affect the group’s operations as we believe that his role may be more of a consultative role in large decision-making processes. The group’s operations and strategy planning are largely spearheaded by its chief executive officer (CEO) Datuk Seri Zafrul Tengku Abdul Aziz, chief financial officer (CFO) Shahnaz Jammal and its management team, which also includes the likes of advisers Renzo Veigas and Thomas Meow. In addition, Nazir’s stake in CIMB is only 0.47% and as such will not cause a share overhang if he were to sell down his stake. His exit may also pave the way for investors’ perception of a more institutionalised and professionally managed CIMB.

Despite the potential risk of a slower domestic corporate loan growth trend and weaker near-term investment banking income outlook, given the heightened capital market volatility, we think current valuations at -1 standard deviation to its long-term mean price-earnings ratio (PER) and price-to-book (P/B) ratio have priced in the above-mentioned earnings risks. We continue to project an above-industry earnings growth of 16% for financial year 2018 (FY18), driven by a downward normalisation in credit cost to 56 basis points (bps) versus FY17’s 76bps. The stock continues to trade at an attractive 10.3 times PER based on FY18 forecast (F) (five-year historical mean: 13.3 times) and 1.06 times FY18F P/B ratio (historical mean: 1.2 times). — UOB Kay Hian, July 2

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