Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily, on April 22, 2016.

 

CIMB Group Holdings Bhd 
(April 21, RM4.92)
Upgrade to buy with a higher target price (TP) of RM5.50:
We met CIMB Group Holdings Bhd chief financial officer Shahnaz Jammal for company updates. We gather that the asset quality of the group’s loans in Malaysia remain stable with no upticks in impairments of retail loans as expected earlier.

CIMB_chart_fd_220416

Meanwhile, in Indonesia, there were no new segments showing a rise in non-performing loans other than commodities (coal and coal-related loans), which had been highlighted earlier with substantial provisions already made. Provisions are likely to be still elevated for CIMB Niaga in the first quarter of financial year 2016 (1QFY16) and 2QFY16 before improvements, albeit not drastic, are seen in the second half of FY16 (2HFY16).

Cost-rationalisation initiatives are on track and the cost-to-income (CI) ratio on business-as-usual basis is likely to improve to 53% in FY16. On business-as-usual basis, the group is targeting to control the growth of its operating expenditure (opex) to 3% year-on-year (y-o-y) for FY16. 

We understand the cost initiatives undertaken are on track to reduce its CI ratio towards 50% under its T18 target.

For FY16, it is expected that the group’s CI ratio be improved to 53% from 55.6% as at the end of FY15. The benefit of the reduction in opex from its mutual separation scheme exercise will be realised in FY16.

As at December 2015, CIMB Thai branches have already been reduced to 130 from over 160 and are expected to be scaled back further from 130 to between 80 and 90 branches by 2018. 

Challenges remain in growing net operating income in 1QFY16, but improvement has been seen in market business in March 2016. 

We understand from the meeting that market business (fixed income and equity capital market) was still challenging in the first two months of calendar year 2016, but in March 2016, a pickup in momentum has been seen. Meanwhile, foreign exchange (forex) business continues to be decent due to market volatility.

Management continues to maintain its guidance for FY16. Management continues to guide a net interest margin (NIM) compression of 5 basis points (bps) to 10bps from 2.66% as at end-FY15. 

By countries, NIM in Malaysia will contract by 5bps to 10bps, while in Indonesia, management is guiding for CIMB Niaga’s NIM to drop by 20bps to below 5% due to portfolio rebalancing towards higher quality credits and shorter-term working capital facilities, and its strategy to refocus on growing mortgage loans. 

NIMs for Thailand and Singapore are likely to be flat with a marginal improvement for Singapore due to optimisation of liquidity. The group is maintaining its loan growth of 10% for FY16 with Malaysia growing by a single digit, Indonesia by 7% to 8%, and Thailand and Singapore by double digits.

The group recorded a common equity tier 1 (CET1) ratio of 10.3% in FY15. 

Over the next 12 months, we understand that the group targets to raise its CET1 ratio by 30bps to 50bps with a 4bp to 5bp uplift in the ratio coming from the group’s disposal of its 51% stake held by its two subsidiaries CIG Bhd and CIMB Niaga in PT CIMB Sun Life (insurance company in Indonesia) to Sun Life Assurance for 550 billion rupiah (RM162 million).

We upgrade to “buy” from “trading buy” with a revised TP of RM5.50 after rolling over our valuation period to FY17 at 1 times price-book multiple. 

We remain positive on the group’s cost initiatives in gradually lowering its CI ratio and are expecting improvement in its net profit for FY16 and FY17. 

We see sentiment on the stock improving with a pickup in foreign shareholdings to 28.2% in March 2016 from a low of 26.6% in January. 

1QFY16 results of CIMB Niaga and CIMB Group are expected to be released on April 28 and May 26 respectively. — MIDF Research, April 21

      Print
      Text Size
      Share