• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM6.30/share. Our fair value is based on FY19 P/BV of 1.1x, supported by an ROE of 9.7%.

• We met the management of CIMB Group yesterday for updates. We understand that the group is likely to report core earnings for the full FY18 below its ROE target of 10.5%. This will be attributed to lower interest income from the strong NIM compression for Niaga of 50-60bps in FY18 by dint of interest rates hikes in Indonesia. Besides, it will also be contributed by the lower non-interest income (NOII) owing to a weaker markets’ business in Malaysia. On the flipside, the cost of growth on a BAU basis of 1 to 2% has been well controlled while credit cost is likely to improve and be lower than the guidance of 0.55% to 0.60% for FY18. Nevertheless, these are inadequate to offset the weaker income growth in FY18 and are likely to lead to a miss in achieving its intended ROE of 10.5% and CI ratio target of 50.0%. The shortfalls in FY18 ROE and CI ratio are not surprising as we have already factored in our estimates for FY18 projections of 9.5% and 51.0% respectively, excluding all one-off gains.

• Group CET1 ratio in FY18 is expected to be above 12.0%. Management targets to raise it to 13.0% eventually, and the group will continue with the DRS scheme to achieve this.

• The group is guiding for a loan growth of 6.0% in FY19. This will be largely driven by the expansion of loans in Malaysia. For Malaysia, we gather that in FY19, retail loan growth is likely to taper due to a slower expansion in mortgage loans while corporate loan growth is looking steady with a decent pipeline of deals in 1QFY19. We understand that there remains some cautiousness in corporate activities as some of the new government’s policies remain unclear. Meanwhile in Indonesia, the target is to achieve a loan growth of mid-single-digit for FY19, improving from a low singledigit growth in FY18. As for Thailand and Singapore, a slightly better loan growth has been targeted for this year.

• On the group’s FY 19 NIM, management guidance is a compression of 5-10bps, similar to FY18. This is expected to be due to structural changes in the Malaysian mortgage book which will still decline in yield. Meanwhile, margins in Indonesia are likely to be slightly lower or flat at best in FY19 vs. FY18. In FY19, loan rates in Indonesia will be repriced upwards, adjusting to the earlier interest rate hikes by Bank Indonesia. The potential further rate hikes in Indonesia will be lesser as the number of possible Fed rate increases will taper in FY19. Nevertheless, this could still be offset by the lower yields of new loans booked which are higher quality in Indonesia. On the other hand, NIMs in Singapore and Thailand are expected to remain stable.

• For FY19, we are projecting a credit cost of 0.52% (FY18: 0.50%) against management’s guidance of 0.40%– 0.45% largely based on the anticipated slowdown in economic growth. Certain provisioning could be taken for some oil & gas loans but this is unlikely to cause significant increase in the allowances for loan losses. Management hinted that the provisions in Thailand could rise in 2019. However, this will be significantly lower than the top-up in collective provisioning under the requirements of the central bank, Bank of Thailand (BoT) seen in the 4QFY18. Credit charge-off in Thailand is likely to remain around the region of 100 to 200bps in FY19. Over in Indonesia, credit cost guidance is a circa 150bps for FY19.

• Recall that 4QFY18 results of CIMB Thai saw earnings in the subsidiary significantly lower. The rise in operating expenses (higher personnel and IT cost) as part of the expansion strategy and higher provisioning as required by the BoT ahead of the implementation of FRS 9 in Thailand in 2020 were the key factors.

• On the markets’ business, we understand that it is still soft and we have imputed an expectation of a subdued NOII growth in FY19.

• To recap, the following are the initial guidance for FY19:

• loan growth of 6.0%;

• NIM compression of 5–10bps; and

• credit cost of 0.40% to 0.45%.

Source: AmInvest Research - 24 Jan 2019