CIMB Goup Holdings Bhd
(Feb 9, RM5.70)
Maintain hold call with an unchanged target price of RM6.20. CIMB announced some key senior management changes last Friday. There had been speculation on this earlier and we believe the market has partly priced this in. 

The changes came as a surprise to us as we noted that certain well-regarded senior management names have been moved up as advisers to the group chief executive officer and have been replaced by new blood to propel the group ahead in the face of an evolving operating environment and banking landscape. 

CIMB’s move, which we believe would have been well thought out by the board, may face criticism from the investment fraternity.

CIMB’s Target 2018 (T18) initiatives aim to drive cost-to-income ratio down to below 50% as a core ambition, in our view. CIMB will also reassess its Asia-Pacific investment banking (IB) presence and targets to reduce IB and equities costs across the franchise by about 30% in 2015. 

Supplemented by consumer banking to eventually contribute 60% of income, this should lift return on equity (ROE) to more than 15% by the end of financial year 2018 (FY18). 

Three key businesses — commercial and small and medium enterprise banking, transaction banking and digital banking — are targeted to deliver a profit before tax uplift of RM1 billion (+1% to 1.5% in ROE) by FY18. 

Raising common equity Tier-1 ratio to more than 11% is also a target. Smaller mergers and acquisitions to expand its regional footprint will be considered and we believe this hints at its aim to add the Philippines to its portfolio.

CIMB appears to be setting the stage for the next three years after failing to proceed with the merger with RHB Capital Bhd and Malaysia Building Society Bhd, which would have been a game changer in the Malaysian banking arena. 

We believe it is too early to judge if its T18 initiatives will be successful or otherwise. In our view, investors should see this as a strategic step forward amid the changing banking landscape. 

There will no doubt be near-term earnings weakness starting from the upcoming set of results for the fourth quarter of FY14 which will be released next week. The drag is likely to be felt throughout FY15 (forecast results). — AllianceDBS Research

This article first appeared in The Edge Financial Daily, on February 10, 2015.