This article first appeared in The Edge Financial Daily on March 22, 2019
CIMB Group Holdings Bhd
(March 21, RM5.33)
Maintain hold with a target price (TP) of RM6: To recap, CIMB’s Target 2018 (T18) initiatives focused on becoming leaner and strengthen core areas like small-and medium-sized enterprises (SMEs), digital consumer and transaction banking. CIMB was unsuccessful in meeting some of the 2018 financial goals that it originally set out to achieve four years ago — had the ambition to generate more than 15% return on equity (ROE) and about 50% cost-to-income ratio (CIR) but only posted 9.6% and 52.6% respectively. Despite the misses, it showed good progress between 2014-18 where the ROE inched up 30 basis points (bps) while CIR fell 6.5 percentage points (ppts). As for capital position, CIMB chalked in Common Equity Tier 1 (CET1) ratio of 12.6%, realising its >11% target.
The primary objective of CIMB’s Forward23 blueprint is to pursue growth via top line, anchoring on Malaysia and Indonesia markets (both combined to more than 80% of profit before tax [PBT]). CIMB is looking to increase productivity, customer experience, and sales, aside from leveraging on the foundation built by T18; these include: (i) digitisation efforts, (ii) data analytics, (iii) personalised services and (iv) form strategic partnerships. To benchmark, it has outlined three financial targets for 2023 — (i) raise ROE to 12-13%, (ii) bring CIR down to 45%, and (iii) maintain CET1 ratio at 13%.
While we laud all of the initiatives that CIMB is taking on over the next five years, we are of the view that its 2023 financial aspirations are stretched, particularly CIR and ROE. Unlike T18, which has some controllable element to ensure a certain degree of success, Forward23 is partly dependent on external support like economic climate.
Assuming a cost base inflation of 3%, our calculations indicated total income has to grow at a five-year compound annual growth rate (CAGR) of 6.5% in order to lower CIR to 45%. We note this is higher than the 3.8% revenue CAGR, CIMB booked from 2014-18.
For ROE to climb to 12-13%, CIMB must grow earnings at a much rapid pace (we estimate 10-11% per annum with 50% dividend payout and 80% reinvestment rate) or find ways to reduce its equity position. We believe both are difficult tasks as CIMB has to contend with a myriad of factors like (i) preserving net interest margin (NIM), (ii) lifting average loans growth, (iii) keeping operations expenditure and credit cost low, and (iv) look to up cash dividends.
No changes to 2019-20 earnings forecasts. Introduced 2021 estimates while premised on 1.04 times 2019 price-to-book (P/B) ratio with 9.3% ROE, 9% core operating earnings and 3% long-term growth. This is in line with its five-year mean of 1.08 times but below the sector’s 1.18 times. The discount is fair given lower ROE generation, which is 1ppt beneath industry average. At current levels, the stock’s risk-reward profile remains balanced. Although CIMB is trading close to -1 standard deviation to its five-year mean P/B and price-to-earnings ratios, we reckon there is still scope for 2020-21 earnings downgrade by the street (too bullish with their projections but we are already 3-8% more conservative versus them). — Hong Leong Investment Bank, March 21