• We maintain our fair value (FV) on CIMB Group of RM6.60/share, pegging it on FY18 P/BV of 1.2x, supported by an ROE of 10.5%. The share price has recovered well. With the strong share price performance of banking stocks recently, the share price has overshot our FV of RM6.60/share. However, we are maintaining our BUY call and FV for now pending management’s guidance for FY18. Any retracement in its share price is an opportunity to accumulate.

• The group presently holds a 60% stake in CIMB-Principle Asset Management Bhd (CPAM) and 50% in CIMB-Principal Islamic Asset Management Sdn Bhd (CPIAM). Principal Financial Group Inc (PFG) owns the remaining 40% and 50% shares in CPAM and CPIAM respectively.

• It was announced that the group will be divesting its 20% stake (24,694,959 shares) in CPAM and 10% equity (1,200,000 shares) in CPIAM to Principal International (Asia) (PIA) and Principal Financial Services Inc (PFI) respectively for a total consideration of up to RM470.3mil. Both PIA and PFI are the subsidiaries of PFG.

• After the disposal, CIMB’s stakes will be reduced to 40% in both CPAM and CPIAM, with PFG owning the remaining 60% in the entities. The realignment of equity interest of CIMB and PFG in CPAM and CPIAM will be a win-win situation for both parties. It will enable the JV entities to leverage the distribution capabilities of CIMB and the global asset management expertise of PFG to better serve their customers.

• CPAM and CPIAM will cease to be subsidiaries of the group, and become JV entities with PFG as the partner of CIMB. Eventually, both entities will be accounted for in the balance of the CIMB as investments in JV with the share of income in the JV reported in P&L. CPAM reported a PBT of RM132.3mil in FY16. For 9MFY17, the asset management business recorded a PBT of RM96mil. The disposal of shares in CPAM and CPIAM is not expected to have any material adverse impact on the income contribution of the asset management business to the group.

• The disposal will result in a gain of RM950mil to the group, largely from the disposal of CPAM with the gains from sale of 10% equity in CPIAM to be minimal. We understand that one-third (RM317mil) of the RM950mil gains will be derived from the difference between the disposal consideration and the carrying value of the group’s 20% stake in CPAM. The other two-thirds (RM633mil) will be from the revaluation of the group’s remaining 40% equity in CPAM after the disposal of 20% shares in the entity.

• This transaction is expected to be completed by 2QFY18. The gains are expected to be recorded as part of non-interest income in FY18.

• We view that the gains of RM950mil as one-offs, and will not be factoring it into our estimates, thus will not affect our ROE estimate for FY18 of 10.5%, which is based on recurring earnings. Hence, this transaction will not have any impact on our valuation. The gains of RM950mil will provide an uplift of 18bps to the group’s CET1 ratio. Recall as at end-3QFY17, the group’s CET1 ratio stood at 12.0%, which is on track to meet its T18 target.

Source: AmInvest Research - 12 Jan 2018