CIMB’s credit costs seen staying healthy

This article first appeared in The Edge Financial Daily, on April 12, 2019.
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CIMB Group Holdings Bhd
(April 11, RM5.06)
Maintain hold with a lower target price (TP) of RM5.35 from RM5.95:
We expect near-term earnings growth to be unexciting as macro headwinds and cautious market sentiment persist. Revenue expansion is still a concern with normalising loans growth in Malaysia and Indonesia, thinning net interest margins (NIMs) arising from deposit-led competition in Malaysia, and shifts to a more conservative loan portfolio and still-uncertain non-interest income (NII) trends. Potential policy action may be an additional drag on earnings. That said, asset quality is on a better footing while credit costs should stay at healthier levels. Current guidance indicates some earnings growth weakness with a lower return on equity (ROE) of 9% to 9.5% and a cost-to-income ratio of 53% for financial year 2019 (FY19). Even with cheaper valuations, there may still be downside risks to earnings.

Our FY19 to FY21 earnings forecasts are below the consensus, likely due to lower net interest income and non-interest income, but partially offset by lower provisions and overheads.

A recovery in market activity arising from more optimistic market sentiment driving NII and better-than-expected NIM trends will help grow CIMB Group Holdings Bhd’s earnings and share price. The group’s investment in Touch ‘n Go, while small, could serve as a rerating catalyst if the payment channel system starts dominating the payment space and rapidly expands over time in its effort to develop an e-wallet.

We maintain “hold” with a lower TP of RM5.35. Our TP, which is based on the Gordon Growth Model, implies one time FY19 forecast (F) book value multiple. We have assumed a lower return on equity assumption of 9.7% ahead of weaker earnings traction and rolling over our valuation base to FY20F. Our other assumptions include a 5% long-term growth and 10.2% cost of equity.

Key risks to our view include negative macro trends, soft market sentiment and a reversal of asset quality. Larger-than-expected NIM compression from greater competitive pressures and negative market sentiment impacting NII  and higher-than-expected credit costs are key risks. — AllianceDBS Research, April 11