CIMB Group - No Shot in the Arm

Date: 29/04/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  5.60      |      Price Call  :  HOLD
        Last Price  :  5.26      |      Upside/Downside  :  +0.34 (6.46%)

Last Friday’s briefing was lacking material positive updates to induce us to be bullish on the stock. Overall, CIMB reiterated its 2019 guidance. Forecasts are unchanged as the underlying operational trends in 1Q19 are performing up to expectations. For now, the stock’s risk-reward profile remains balanced despite its seemingly inexpensive valuations (trading at -1SD to its 5-year mean P/B and P/E) given the downside risk to consensus FY19-21 earnings projection (ours are more conservative). Maintain HOLD and GGM-TP of RM5.60, based on 0.98x FY19 P/B.

Management held a pre-results meeting on Friday. Discussions were around its broad operational trends in 1Q19. More importantly, CIMB reiterated its 2019 guidance: (i) 6- 7% loans growth; (ii) 5-10bp NIM slippage; (iii) flattish cost-to-income ratio at c.53%; (iv) 40-50bp net credit cost; and (v) 9.0-9.5% ROE.

Loans growth tracking guidance. Management shared that 1Q19 loans growth is so far tracking expectation, led by Malaysia and Indonesia. Domestically, QoQ lending was relatively flat but YoY, it increased, thanks to the consumer (4Q18: +3% QoQ, +8% YoY) and corporate segments (4Q18: flat QoQ%, +7% YoY), whereby both successfully sustained their growth momentums. While for Indonesia, CIMB continues to see further loans acceleration in 2H19 given more infra-related drawdowns and the decline in auto lending and personal financing to halt.

Sequential respite in NIM cannot last. In Malaysia, there may be some respite in QoQ NIM considering the offsetting impact from the 10bp base rate hike in Dec-18 against the escalating cost of fixed retail deposits. However, a severe YoY contraction can be expected since there was an OPR hike back in Jan-18. As for Indonesia, NIM improvement is limited going forward as management further de-risk its lending portfolio and also, cost of funds has been on the rise given the lack of liquidity in the system. While in Thailand, NIM compression is expected to stay on the back of the strategy switch to lower-yielding but safer assets.

Other findings. On a QoQ basis, we gathered that 1Q19 non-interest income saw a nice rebound but YoY it was only slightly better. In essence, the treasury business experienced a recovery (improved capital markets) and transaction banking continues to anchor overall fee income growth. Whereas, cost-to-income ratio is seen to be stable despite the front load of IT spending and the impact will be more felt from 2020 onwards. Besides, we understand that 1Q19 net credit cost is comparable to 1Q18 i.e. 49bp (4Q18: 33bp). Lastly, CIMB maintained that when its CET1 ratio hits 13.0% (4Q18: 12.6%), the current dividend reinvestment scheme may be reviewed to introduce a cash element (similar to Maybank’s dividend structure); this in turn should bode well for its future ROE generation.

Forecast. Unchanged since there were no material positive updates from the briefing. Also, underlying operational trends in 1Q19 are performing up to expectations.

Retain HOLD and GGM-TP of RM5.60, based on 0.98x 2019 P/B with assumptions of 8.9% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year mean of 1.07x and the sector’s 1.15x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath both its 5-year and industry average. Also, this helps to explain the reason for trading at -1SD to its 5-year mean P/B and P/E. Besides, we think there is still scope for FY19-21 earnings downgrade by consensus (ours are 3-10% lower). Hence, despite its seemingly attractive valuations, the stock’s risk-reward profile remains balanced.

Source: Hong Leong Investment Bank Research - 29 Apr 2019

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