CIMB Group - KPI Misses in the Offing

Date: 24/01/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  6.00      |      Price Call  :  HOLD
        Last Price  :  5.26      |      Upside/Downside  :  +0.74 (14.07%)

There were no significant positive updates from yesterday’s meeting to compel us to be more bullish on the stock. Do expect some 2018 KPI misses while broad operational takeaways for its OpCos remained unexciting. Forecasts are unchanged given our already conservative projections. All in, we continue to see a symmetrical risk-reward profile as it is trading near to -1SD to both its 5- year mean P/B and P/E while offering c.5% dividend yield. Maintain HOLD with a GGM-TP of RM6.00, based on 1.03x 2019 P/B.

Management held a pre-results meeting yesterday. Discussions revolved around its broad operational trends in 2018. For 2019’s outlook, management is still relatively tight-lipped, pending its 4Q18 results release, tentative on 28 February.

Expect some misses. CIMB shared the two KPI targets that they were unlikely to achieve in 2018 are: (i) 10.5% ROE (9M18: 9.8%) and (ii) 50% cost-to-income ratio (9M18 CIR: 51.6%). This was primary due to frail 4Q18 non-interest income (9M18 NOII: -16%) contribution as capital market-related business in Malaysia did not pick up as fast as hoped given the macro and policy uncertainty. That said, we are not caught off guard with the possible misses, as we have imputed a -14% NOII contraction in our model while both our ROE and CIR estimates are conservative at 9.4% and 51.6% respectively.

Indonesia still unexciting. We gathered that CIMB Niaga’s 2018 net interest margin (NIM) is likely to compress by 50-60bp (9M18: -62bp), no thanks to the 6 domestic rate hikes last year. For 2019, we should see some NIM improvement from asset repricing but over the medium-term, management alluded that NIM should be challenged by lower yields as it aims to further de-risk its lending portfolio. As for loans growth, 2018 should see a low single-digit percentage increase (9M18: +2%) and similarly, it is expected to be muted in 1H19 - prospective borrowers adopt a wait and-see attitude given the upcoming general election in April. Lastly, credit cost guidance for 2018 was intact at of 150bp (9M18: 167bp).

Worst is over for Thailand? The strategic direction of CIMB Thai remains the same whereby focus is on the retail business. The rise in personnel and IT costs seen in its recent results were deliberate to help acquire growth after 4-5 years of diligent de risking and cleaning up its books. Besides, the higher 4Q18 loan loss allowance was due to a top-up in general provisioning as per instructed by the Bank of Thailand (ahead of local FRS9 implementation in 2020). We understand this was one-off in nature and is unlikely to reoccur in the near-term. If any, management only expects minimal increase. Regardless, it does not have any impact on group’s consolidated financials since Malaysia has already embraced MFRS9 from the start of 2018.

Forecast. Unchanged since our 2018 forecasts are below that of management’s targets. Nevertheless, we expect 4Q18 core profit to come in c.RM1.2b (+4% QoQ, +15% YoY) given better NOII QoQ (from a low base in 2Q and 3Q) coupled with lower opex and impaired loan provisions YoY.

Retain HOLD and GGM-TP of RM6.00, based on 1.03x 2019 P/B with assumptions of 9.1% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year average of 1.09x and the sector’s 1.14x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath both its 5-year and industry mean. For now, the stock’s risk reward profile appears balanced. Although there were no significant positive takeaways from the pre-results meeting yesterday, share price downside should be capped as it is currently trading near to -1SD to its 5-year mean P/B and P/E. Furthermore, the stock offers commendable dividend yield of c.5%.

Source: Hong Leong Investment Bank Research - 24 Jan 2019

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