• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.00/share based on FY20 P/BV of 1.0x, supported by an ROE of 9.4%.

• The recent share price weakness was caused by a selldown of the stock after news surfaced that Khazanah plans to issue exchangeable bonds to raise up to US$500mil. In spite of this development, we continue to see value investing in CIMB shares as valuation is cheap at 0.9x FY20 P/BV while dividend yield is attractive at 5.5%. We expect the group’s ROE to improve in the longer run with its Forward 23 strategy. In the nearer term, the ROE is only projected to be 9.3% and 9.4% in FY19 and FY20 respectively. This is due to the investments required in the first two years of the 5-year strategy to accelerate the group’s revenue growth ahead. Nevertheless, we expect the upside potential of CIMB shares to be capped by the premium exchange price reported to be 15% to 20% placed on the shares (around RM6.15 to RM6.40/share), of Khazanah’s exchangeable bonds which allows bondholders the option to convert their securities to CIMB shares at the end of 3 years. We make no changes to our earnings estimates to CIMB Group for now.

• CIMB Thai posted a net profit of THB105mil (or RM13.9mil) in 2QFY19 which fell 67.7% QoQ largely due to lower gains from the sale of NPLs. For 6MFY19, it achieved earnings of THB430mil or RM57.3mil. Cumulative earnings grew 19.4% YoY underpinned by higher net interest income from a strong loan expansion of 10.6% YoY and a decline in provisions, although partially offset by higher operating expenses and lower non-interest income (NOII).

• Non-interest income for 6MFY19 slipped by 7.6% YoY due to losses on financial instruments at FVTPL which offset higher gains from trading and FX transactions. 6MFY19 saw a decline in CIMB Thai’s net fee and service income by 4.1% YoY.

• JAW remained negative for the Thai subsidiary (-15.7%) for 6MFY19 as growth in opex continued to outpace that of total income. The rise in opex of 16.9% YoY was attributed to higher personnel cost in line with the Forward 23 strategy, coupled with higher compensation for retired and senior employees. This led to a higher a CI ratio of 65.8% for CIMB Thai.

• Provisions at CIMB Thai dropped by 31.0%YoY to THB1.6bil resulting in an improved credit cost of 1.35% in 6MFY19 vs. 2.24% in 6MFY18. Credit cost remained in line with management’s guidance of 1.00% to 2.00% for FY19.
• CIMB Thai's NPL ratio recorded a slight increase to 4.5% from 4.3% in the preceding quarter owing to slower repayments of certain corporate and retail loans. This has resulted in the Thai subsidiary’s loan loss cover slipping to 106.5%. Loan-to-deposit ratio for CIMB Thai rose to 131.3% in 4QFY18 as loans grew faster than deposits. Its modified LD ratio has increased to 100.9%.
• Gross loan growth for the Thai subsidiary accelerated to 10.6%YoY in 2QFY19 vs. 10.0%YoY in 1QFY19. On a QoQ basis, CIMB Thai’s gross loans expanded 2.8%.

• NIM contracted to 3.30% in 6MFY19 vs. 3.87% in 6MFY18 due to higher funding cost. Bank of Thailand has maintained interest rate at 1.75% in its recent Monetary Policy Committee meeting on 26 June. We continue to expect the rate to be unchanged for the rest of 2019.

Source: AmInvest Research - 18 Jul 2019