• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM7.10/share. Our fair value is based on an FY18 P/BV of 1.3x on the back of an ROE of 10.5%. Keeping our forecast unchanged for now.

• We met the management of CIMB Group yesterday for some updates. We gather that the group is on track to meet most of its FY18 KPI targets with the exception of loan growth. Malaysia's loans are growing above the industry average but this is likely to be dampened by the slower loan growth of its overseas operations (Indonesia and Thailand). The group has a target for Malaysia loans to grow by 6-7%. Meanwhile, loan growth in Indonesia has lagged behind its target of 5%, impacted partly by the contraction in auto loans due to its strategy to recalibrate loans in this segment for better asset quality.

• On the group’s new mortgage loans in Malaysia, the LTV ranges between 85% and 90%. Average LTV for its mortgage loans is circa 63%. We understand that the growth in the mortgage loans in Malaysia is mainly on loans with the size of between RM300,000 and RM800,000.

• In Thailand, we understand there is still work to be done for its SME business while in Indonesia, work is in progress to clean up its auto loan portfolio (restructuring). The recalibration of its auto loan book will continue until the end of FY18.

• Management sees room for digitalization to automate task and improve its work processes. This will be key to lower its CI ratio from 50% targeted in FY18 to the mid- 40s in the future.

• Potentially further digitalization initiatives could be rolled out regionally in 2HFY18.

• Recall, the group’s deal with China Galaxy Securities to dispose of 50% of the equity broking business under CIMB Securities International was completed on 18 Jan and is likely to results in a one-off gain of circa RM150mil which will be recognized in the group’s 1QFY18 results.

• Meanwhile, for its divestments in stakes in CIMB-Principal Asset Management (CPAM), the deal is expected to be completed in 2QFY18. It will result in a gain of RM950mil (one-third is realized gains and two-thirds are revaluation of the group’s remaining 40% stake in CPAM).

• Management continues to guide for a NIM compression of 5-10bps in FY18. Contributing factors will be due to pressure on Indonesia’s asset yield as well as due to the structural compression from newer mortgage loans with lower rates that will replace the older ones. Meanwhile, NIM in Thailand will be flat or slightly lower while that in Malaysia is expected to rise initially due to the OPR hike and then taper off with the reprising of liabilities. Management is seeing more pressure on liabilities compared to assets.

• We gather than the group’s fee income has been decent but the market-related income has yet to gain significant traction despite the pipeline deals.

• On the credit cost run rate post-MFRS 9, we understand that it is likely to be close to the guided 55-60bps for FY18.

Source: AmInvest Research - 3 May 2018