CIMB Group - Aiming for the Stars

Date: 21/03/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  6.00      |      Price Call  :  HOLD
        Last Price  :  3.81      |      Upside/Downside  :  +2.19 (57.48%)

CIMB is staging a new leg of growth over the next 5 years. In our opinion, their strategies are compelling but not necessarily can hit its 2023 financial targets. Regardless, these efforts should yield some positive outcomes like T18, turning CIMB to be a more well-oiled machine. All in, no change to our 2019-20 earnings forecasts and introduced 2021 estimates. Risk-reward profile remains balanced despite its inexpensive valuations given there is downside risk to street’s 2020- 21 earnings projection (we are conservative vs them). Retain HOLD with a GGM TP of RM6.00, based on 1.04x 2019 P/B.

In this report, we delve deeper into “Forward23”, CIMB’s new 5-year strategic plan, which aims to accelerate growth and future-proof its business; this supersedes the “Target 18” (T18) blueprint that helped to lay the foundation from 2015-18. Besides, we examine whether its financial aspirations for 2023 are attainable.

Mixed track record. To recap, T18 focused on becoming leaner and strengthen core areas like SME, digital consumer and transaction banking. CIMB was unsuccessful in meeting some of the 2018 financial goals that it originally set out to achieve 4 years ago - had the ambition to generate >15% ROE and c.50% cost-to-income ratio (CIR) but only posted 9.6% and 52.6% respectively. Despite the misses, it showed good progress between 2014-18 where ROE inched up 30bp while CIR fell 6.5ppt. As for capital position, CIMB chalked in CET1 ratio of 12.6%, realizing its >11% target.

2023 financial targets. The primary objective of Forward23 is to pursue growth via top-line, anchoring on Malaysia and Indonesia markets (both combined to >80% of PBT). CIMB is looking to increase productivity, customer experience, and sales, aside from leveraging on the foundation built by T18; these include: (i) digitization efforts, (ii) data analytics, (iii) personalized services, and (iv) form strategic partnerships. To benchmark, it has outlined 3 financial targets for 2023 i.e. (i) raise ROE to 12-13%, (ii) bring CIR down to 45%, and (iii) maintain CET1 ratio at 13%.

A tall order to hit. While we laud all of the initiatives that CIMB is taking on over the next 5 years, its 2023 financial aspirations are stretched, particularly CIR and ROE, in our view. Unlike T18, which has some controllable element to ensure a certain degree of success, Forward23 is partly dependent on external support like economic climate.

Assuming a cost base inflation of 3%, our calculations indicated total income has to grow at 5-year CAGR of 6.5% in order to lower CIR to 45%. We note this is higher than the 3.8% revenue CAGR, CIMB booked from 2014-18.

For ROE to climb to 12-13%, CIMB must grow earnings at a much rapid pace (we estimate 10-11% p.a. with 50% dividend payout and 80% reinvestment rate) or find ways to reduce its equity position. We believe both are difficult tasks as CIMB has to contend with a myriad of factors like: (i) preserving NIM, (ii) lifting average loans growth, (iii) keeping opex and credit cost low, and (iv) look to up cash dividends.

Forecast. No changes to 2019-20 earnings forecasts. Introduced 2021 estimates.

Retain HOLD and GGM-TP of RM6.00, premised on 1.04x 2019 P/B with 9.3% ROE, 9.0% COE, and 3.0% LTG. This is in line with its 5-year mean of 1.08x but below the sector’s 1.18x. The discount is fair given lower ROE generation, which is 1ppt beneath industry average. At current levels, the stock’s risk-reward profile remains balanced. Although CIMB is trading close to -1SD to its 5-year mean P/B and P/E, we reckon there is still scope for 2020-21 earnings downgrade by the street (too bullish with their projections but we are already 3-8% more conservative vs them).

Source: Hong Leong Investment Bank Research - 21 Mar 2019

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