• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM5.80/share. Our fair value is based on FY19 P/BV of 1.0x, supported by an ROE of 9.4%. Valuation remains compelling at 0.9x FY19 BV while corporate loans are likely to pick up steam in FY20 with the revival of mega projects locally such as the ECRL and Bandar Malaysia.

• We met the management of CIMB Group today for updates. We gather that the overall loan growth in 1QFY19 is tracking the group’s target of 6.0% for FY19. Loans in Malaysia are growing in tandem with the target of 6.0–7.0% with a stronger momentum for corporate and consumer loans in the recent quarter. Meanwhile, loan growth in Indonesia has also picked up pace with Niaga’s loans accelerating to 5.0%YoY. This was supported by mortgage and corporate loans with the latter contributed by disbursements of infrastructure loans.

• The group raised its base rate (BR) by 10bps to 4.25% in December 2018 due to its higher funding cost from an acceleration in deposit growth in 4QFY18. In 1QFY19, we understand that the funding cost in Malaysia has tapered off slightly. Hence, for another increase in the BR, this will require justification of higher funding cost.

• The D-SIB capital buffer requirement is likely to raise the minimum CET1 ratio requirement for the group to 8.0% from 7.0% presently. Management continues to aim for 13.0% in its CET1 ratio. The disposal of its Malaysia equity business to Jupiter will result in a gain of RM200mil, and this is expected to be accretive to its capital ratio by 10bps.

• On the group’s FY19 NIM, management continues to guide for a compression of 5– 10bps. Contributing to this will be the contraction of Malaysia’s NIM of 5bps due to seasonal pressure on cost of funds. Meanwhile, margins in Indonesia, though improved in 1QFY19 from the gradual reprising of loans after the cumulative rate hikes of 175bps in Indonesia, will still be under pressure moving through the remaining quarters of FY19. Compression on Niaga’s margins is expected with the potentially stronger loan growth in 2H19 after the presidential elections, coupled with the increasing intensity of deposit competition in Indonesia. Nevertheless, we continue to expect the pressure on Niaga’s NIM in FY19 to be lower compared with FY18. Meanwhile, on CIMB Thai, NIM is likely to be pressured ahead by funding cost as well as the shift towards better quality loans which will compress its asset yields.

• With a weak NOII in 4QFY18, non-fund based income is likely to improve in 1QFY19 on the back on higher income from the treasury and market’s segment. Meanwhile, not much activities in terms of deals have materialised for investment banking in the quarter. On a YoY basis, NOII is likely to be weaker due to the one-off gain of RM152mil from the partial disposal of its stake in CSI recorded as well as higher fees from its partnership with Sompo for bancassurance in 1QFY18.

Source: AmInvest Research - 26 Apr 2019