CIMB Group Holdings Bhd
(July 2, RM5.54)
Maintain buy with a higher target price (TP) of RM7: CIMB Group Holdings Bhd and its Indonesian arm PT CIMB Niaga TBK announced the completion of their mutual separation scheme (MSS) exercise. The group will incur about RM443.3 million in MSS cost. CIMB said savings from an approved 3,599 applications (1,891 from Malaysia and 1,708 from Indonesia) were estimated to be at RM291.6 million per year, translating into an 18.2 months’ payback. The reduction in headcount represents 11.1% of the total workforce in the two countries. 

Keeping all other assumptions unchanged, the one-off cost and potential savings would reduce our financial year ending December 2015 estimate (FY15E) net profit from RM3.5 billion to RM3.27 billion but raise FY16E and FY17E net profits by 7% to 8% to RM4.82 billion and RM5.18 billion  respectively. We believe the MSS exercise will bring the group closer to its T18 targets where the cost to income (CTI) is expected to be reduced to less than 50% by 2018 and the return on equity (ROE) increase to 15%. However, we opine that the acceptance level may be below target. This would result in savings of 3% to 5% versus efforts to reduce the overall operating cost by about 30% this year. Imputing for this MSS exercise, we believe the group may have to undertake more aggressive cost-saving initiatives in the next three financial years to lower the CTI, which we estimate would only improve to about 60% (from 64% currently) in FY16 and FY17. 

We, however, remain positive on the management’s overall T18 exercise. To recap, the reorganisation would result in: 1) the creation of a new regional commercial, and small and medium enterprise (SME) banking division; 2) an integrated wholesale banking division combining investment banking, treasury markets and corporate banking to optimise internal synergies and 

sharpen corporate client interface; and 3) regional consumer banking division to drive consistency, further efficiencies and also to build out its “digital banking” capability. 

We believe T18 could help address the micro and macro challenges the industry is facing today. Revamping of divisions and focusing on the SME and consumer banking could help support declining income from investment banking, which management notes will continue to ease on the back of weak capital market activities. High costs have also always been a thorn for the group and more aggressive measures to streamline its Asia-Pacific investment banking business could help address this. 

In line with the slight increase to our FY16 earnings estimates, we raise the TP to RM7 from RM6.80. We continue to see values with the stock trading at FY16E price-to-book value of 1.1 times, below the industry’s average of 1.3 times. — TA Securities, July 2

This article first appeared in The Edge Financial Daily, on July 3, 2015.