This article first appeared in The Edge Financial Daily on October 29, 2019

CIMB Group Holdings Bhd
(Oct 25, RM4.95)
Maintain buy with an unchanged target price (TP) of RM6.30: We met with the group’s management last Thursday, and below are the key takeaways: i) some pressure on loan growth; ii) expectations of third quarter of financial year 2019 (3QFY19) top line to be at a similar level to 2QFY19; iii) credit cost tracking lower than guidance; and iv) it seems comfortable to reach return on equity (ROE) target.

Recall, the management had guided 6% to 7% loan growth for FY19. However, based on current trends, the management expects that loan growth might come in lower than guidance. The main drag for loan growth will be corporate loans in Malaysia which has seen a pullback in either demand or disbursements. This is possibly due to cautiousness in the current business environment. As for the retail segment, loan growth seems stable with mortgage and auto loan as the main drivers in Malaysia. The management expects loan growth in other markets to remain stable as well.

While the management expects there will be net interest margin (NIM) compression this year, it seems that the magnitude will be within expectations. The NIM for 3QFY19 in Malaysia is expected to improve as deposits are repriced lower following the overnight policy rate cut in May. Meanwhile, Indonesia’s NIM will face some pressure from deposit competition and three rate cuts there thus far. However, the group has begun some initiative to capture current account and savings account (Casa) which should ease some of the compression. Overall, we do not expect any downside pressure on net interest income for 3QFY19.

We understand that income from trading and foreign exchange is expected to continue to be a significant contributor to non-interest income (NOII). There will also be some expected one-off gains which we believe should ensure NOII momentum in 3QFY19 is maintained.

Asset quality is expected to remain stable. As such, the management does not foresee any surprise provisions in the remaining quarter this year. We understand there will not be any additional provisions for a particular account in Indonesia as it was fully provided last quarter. Resultantly, credit cost will continue to track below guidance of 40 to 50 basis points, and will likely end in the lower of the range.

Given the expected income performance, the management is comfortable that it will be able to hit its ROE target for FY19 of 9% to 9.5%. We understand that there could potentially be some one-off increase in operating expenses, but this will be mitigated by the lower credit cost. We are expecting an ROE of 9.3%.

There was also a discussion on the potential impact from Budget 2020. The management expects that there could be some positive impact given that it is an expansionary budget. The Group will also participate in some of the initiatives that the government has announced such as the Rent-to-Own home scheme.

We are maintaining our earnings forecast for FY19 and FY20 as the Group will be announcing its result next month.

Overall, we continue to be cautiously optimistic about the group’s prospects. We expect that the group could see its earnings improve in FY19 despite the NIM compression. However, we are cognisant that this will be due to one-off gains seen in 2QFY19 even if it is considered as “business as usual”. Nevertheless, we believe the underlying factors such as income and credit costs are improving. In terms of valuation, we believe that the group’s valuation is cheap at current juncture as it trades below one time price to book value (PBV). We do not believe such valuation is warranted for the group given that we do not foresee any deterioration in its fundamentals. Hence, we maintain our “buy” call with an unchanged TP of RM6.30, based on pegging its FY20 book value of equity per share at a PBV of 1.1 times. In addition, its dividend yield of 5% should provide some protection to investors from any downside risks. — MIDF Research, Oct 25