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This article first appeared in The Edge Financial Daily on January 22, 2018

CIMB Group Holdings Bhd
(Jan 19, RM6.83)
Maintain buy with a fair value (FV) of RM6.60:
We maintain our “buy” recommendation for CIMB Group Holdings Bhd (CIMP Group) and a FV of RM6.60 per share for now pending the management’s guidance for financial year 2018 (FY18). Our FV is based on FY18 price-to-book-value (P/BV) of 1.2 times, supported by a return on equity (ROE) of 10.5%. We are keeping our forecast unchanged. 

CIMB Group’s 93.7%-owned subsidiary CIMB Thai reported a net loss of  170 million baht in the fourth quarter of FY17 (4QFY17). The decline in earnings (-321.5% quarter-on-quarter (q-o-q) was contributed by lower net interest income, decline in non-interest income (NOII) largely due to a drop in gains from trading and foreign exchange (forex) transactions, and higher operating expenses (opex). Nevertheless, for the full 12MFY17, earnings of CIMB Thai returned to the black, driven mainly by lower provisions. The Thai subsidiary registered a net profit of 385 million baht or RM47.7 million (+161.1% year-on-year (y-o-y)) for FY17 compared to a loss of 630 million baht in FY16 which was dragged by significantly high provisions taken in 4QFY16. The subsidiary’s earnings are expected to contribute minimally to the group’s profits in FY17 (<5%)

The total 12MFY17 income grew modestly by 1.8% y-o-y while opex rose by 2.6% y-o-y. The increase in opex was underpinned by one-off business rationalisation expenses in closing down its branches and credit card business in Thailand. This led to a higher cost income (CI) ratio for CIMB Thai of 57.9% in FY17 versus 57.4% in FY16. Excluding the one-off expenses, the FY17 CI ratio would be lower at 56.9%, an improvement of 50 basis points (bps) y-o-y. 

On the positives, provisions were stable q-o-q and were lower by 19.5% y-o-y to 5.1 billion baht in 12MFY17. This resulted in a lower credit cost of 2.31% in FY17, an improvement from 2.96% in FY16. 

CIMB Thai’s non-performing loan (NPL) ratio improved to 4.8% in FY17 compared with 6.1% in FY16, contributed by the sale of NPLs in the financial year, the focus on asset quality and loan collection. Its loan loss cover has strengthened to 93.2% in FY17 versus 77.3% in FY16. The Thai subsidiary’s loan-to-deposit ratio remained stable at 123.2% as at the end of FY17 while its modified loan-to-deposit ratio was 96.8%. Gross loan growth for the subsidiary picked up pace with a growth of 1.9% q-o-q in 4QFY17. For 12MFY17, its loan growth was 3.1% y-o-y, behind its target of 5% to 10%. 

FY17 net interest margin saw an improvement by 12bps y-o-y to 3.89% (FY16: 3.77%) due to a more efficient management of funding cost. 

For FY17, NOII slipped 3.6% y-o-y. This was due to lower gains on investments and higher losses on financial liabilities which offset an increase in net fee and service income from mutual funds, corporate finance and hire purchase as well as higher gains on trading and forex transactions. — AmInvestment Bank, Jan 19

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