Investment Highlights

• We maintain HOLD on CIMB Group Holdings (CIMB) with an unchanged fair value of RM3.10/share based on a FY21 ROE of 4.9%, leading to a P/BV of 0.5x. We make no changes to our earnings estimates.
• Management provided a briefing last Friday on the refined group strategy known as Forward 23+.
• Despite its ranking as the 5th largest Asean universal bank by asset, the 2 nd and 6th largest in Malaysia and Indonesia respectively, the group still lags its peers in terms of ROE. CIMB’s ROE plummeted to 8.5% in 2019 from 15.0% in 2009.
• Besides ROE, management has identified other areas which the group needs to improve on. These included portfolio allocation where low return businesses had been over invested while higher return businesses were under invested. Additionally, the group’s CI ratio at 55.5% (based on reported numbers) was higher than the peer average while its credit cost was elevated at 132bps in 1H20.
• CIMB has RM9.7bil in total of goodwill and intangible assets contributed by its past acquisitions of banks and securities firms which lock up its capital. We understand that the dual holding company structure also has impacted the group’s efficiency.
• Another challenge was the decline in Malaysia’s net promoter score (NPS) due to the downtime for CIMB Clicks. The group has managed to arrest the issue, raising the uptime on CIMB Clicks to 98.7% in 1H20 from 94.7% in 2019.
• The group has been focusing on growing asset and revenue rather than earnings. Also, management recognised the need to invest in technology to further digitalise, provide greater stability and better analytics.
• The recalibrated Forward 23+ has been extended to 2024 due to the Covid-19 pandemic. The refined strategy focuses on achieving the ranking of a top quartile bank in terms of ROE (ROE of around 12–13%), lowering CI ratio to 45.0% and attaining a CET1 ratio pof 13.0% by 2024.
• The group aims to reshape its portfolio by accelerating profitable growth segments while fixing and turning around those underperforming businesses.

Exhibit 3 depicts the group’s plans to reshape the group’s portfolio by county.

• To achieve higher cost efficiency, it will tighten the management of expenses, reset cost base, and raise productivity. Also, it intends to further digitalise, automate processes, eliminate duplication as well as streamlining the group structure and operating model. In FY20, the group aims to reduce its operating cost by RM500mil (-5%). So far, in 1H20, operating expenses have been lowered by 3.3% YoY. Between 2020 and 2024, CIMB is aiming for a sustainable cost growth of 2–3 per annum.
• For Forward 23+, the group will be more selective on areas to compete in as shown in Exhibit 2. In Malaysia, the group will target all segments as a universal bank. Meanwhile, in Indonesia, it aims to be a focused universal bank competing in the consumer, SME and high-quality wholesale space. In Singapore, the focus will be on Asean wholesale segment and to be the preferred niche player in commercial business. The group also seeks to be a focused player in Thailand, focusing on Asean wholesale business and to become a niche player in consumer finance.
• While the plans on cost management looks to be positive over the medium term, the achievement of a higher ROE target by 2024 will still be largely dependent on the containment of the Covid-19 pandemic and recovery of regional economies. A further prolonged duration of the pandemic will impact both the revenue and provisions of the group, and this could delay the achievement of the objectives/targets of the refined strategy.

Source: AmInvest Research - 19 Oct 2020