Investment Highlights

• We are upgrading our call on CIMB Group Holdings (CIMB) from HOLD to BUY with an unchanged fair value of RM7.00/share. This is due to the recent share price weakness, resulting in the stock turning attractive trading at 1.0x P/BV to our FY19 BV/share. Our fair value is based on an FY19 ROE of 11.3%, leading to P/BV of 1.2x. We make no changes to our estimates for now.

• The group reported a net profit of RM1.3bil (+23.2%QoQ; + 10.6%YoY). On a year-on-year basis, the improvement was contributed by lower operating expenses (OPEX), a decline in provisions and one-off gain of RM152mil from the sale of its 50% stake in CIMB Securities International (CSI) to China Galaxy.

• Excluding the gain of RM152mil, core net profit was RM1.15bil (+12.5%QoQ; -2.3%YoY). 1QFY18 core earnings were within expectations, making up 22.1% of our and 22.4% of consensus estimates. ROE for 1QFY18 based on core earnings was 9.5% against our projection of 10.5%.

• The one-off gain from the sale of its 50% stake in CSI provided an uplift of 14bps to the group’s CET1 ratio. This has help cushioned the drop in the ratio resulting in a decline of only 70bps on day 1 of the implementation of MFRS 9. This was consistent with management guidance of a 70-80bps drop in CET1 ratio after the adoption of MFRS 9.

• The group's gross loan growth was subdued at 0.5%YoY or 0.6%QoQ impacted by FX translation due to the strengthening of the domestic currency. Excluding the FX impact, the group’s loan growth was 5.3%YoY.

• Group NIM rose by 4bps QoQ to 2.57% in 1QFY18 due to the recent OPR hike in Malaysia. Meanwhile, comparing on year-on-year basis, NIM fell by 15bps due to the compression of margin in Indonesia.

• OPEX declined by 6.8%YoY due to the deconsolidation of CSI leading to an improved CI ratio of 49.8%. Cost saving from the deconsolidation of CSI is a circa RM150mil per quarter.

• The group's impaired loans in 1QFY18 decreased 4.4%QoQ to RM10.5bil. This was due to lower impaired loans in Indonesia and Singapore, partially offset by an increase in Thailand while that in Malaysia was stable. Overall GIL ratio improved to 3.2% in 1QFY18 from 3.4% in 4QFY17. 1QFY18 credit cost of 0.49% was lower than our projection of 0.60% for FY18.

• As at the end of 1QFY18, the group’s CET1 ratio remained healthy at 11.7% and is on track to meet its T18 target of 12.0%. The completion of the sale of its stake in CIMB Principal Asset Management in 2QFY18 will see a gain of RM920mil recognized, further uplifting the group’s CET1 ratio by 15bps.

Source: AmInvest Research - 31 May 2018