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This article first appeared in The Edge Financial Daily on May 8, 2018

CIMB Group Holdings Bhd
(May 7, RM6.67)
Maintain buy with an unchanged target price (TP) of RM7.80:
The share price of CIMB Group Holdings Bhd fell sharply by -3.29% last Friday. In fact, it had been on a downtrend since April 30, retreating -6.6% during the period. We believe that the share price retracement could be due to profit-taking activities. In our opinion, the share price retracement presents an excellent opportunity to accumulate the stock. This is due to the fact that we believe that the fundamentals of CIMB Group are still intact with solid earnings potential for financial year 2018 (FY18) and FY19. In addition, we opine that there is an investment case in the medium term as well.

One of the factors that we believe will drive earnings growth is our expectations of better loan growth for FY18. Recall that in FY17, CIMB Group’s gross loan growth grew only +0.2% year-on-year (y-o-y) due to its overseas market. Hence, even with minor recoveries it will translate into a more solid loan growth. For FY18, we are expecting a gross loan growth of +6% y-o-y. In addition, we expect net interest margin compression to be benign with at most -2 basis points (bps) from last year’s level. Both of these will drive FY18 top-line growth.

With respect to cost, we expect it to be well maintained with the cost-to-income (CI) ratio at about the 50%-52% level. While there may be some further cost consolidation, this will be mitigated by the investments needed to be made for its digital offerings, which will be funded by a one-off gain from the divestments.

We expect that asset quality will continue to improve in FY18. This is especially with improvements made in Indonesia and Thailand. For example, gross nonperforming loans fell -24bps quarter-on-quarter and -40bps y-o-y to 3.51% in Indonesia as at the first quarter of FY18 (1QFY18).

Based on 1QFY18 results that have been announced for Indonesia and Thailand, we could expect the group’s overseas operations to contribute more and provide a boost to the group’s earnings. In fact, we understand that the management is developing a strategic direction beyond its Target 2018 (T18) initiatives with the expectation for its overseas operations to contribute more and be earnings-accretive to the group.

Besides, in the short term, we believe the group has a strong investment case in the medium term as it looks beyond the T18 initiatives. One area for growth is the prospect of the group growing its digital-banking footprint. This will be done for customer acquisition and retention, via its distribution channels such as the Internet and mobile. Digital banking will also give an avenue for the group to explore and take advantage of data analytics. Besides top-line opportunities, digital banking will also have a positive impact on the CI ratio once implemented.

We make no changes to our forecasts pending the group’s 1QFY18 results later this month. With the group’s earnings potential expected to be remain solid in FY18 and FY19, we opine that it is an opportune time to take advantage of the share-price retracement. We believe that the timing is particularly important given the potential relief rally after the 14th general election as per the view of our strategist. Hence, we reiterate our “buy” call. Our unchanged TP of RM7.80 is based on pegging its FY18 book value per share at price-to-book value multiple of 1.4 times. — MIDF Research, May 7

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