• We maintain our BUY recommendation on CIMB Group. Despite the recovery in its share price from the recent heavy selldown, valuation on the stock still remains attractive in our opinion, trading at 1.0x FY19 P/BV. We make no changes to our fair value of RM6.80/share which is based on an FY19 P/BV of 1.2x supported by an ROE of 10.8%. Maintain our earnings’ estimates on CIMB Group for now.

• From our meeting with the management of CIMB Group yesterday, we understand that the operating conditions in Indonesia are still challenging. Thus far this year, Bank Indonesia has raised interest rates by 100bps to defend the rupiah (IDR). This is expected to exert pressure on the NIM of its Indonesian subsidiary, Niaga. The instantaneous upward repricing in short-term deposit rates while loan rates lagged, adjusting only 2 to 3 months later will have a negative impact on Niaga’s NIM. Niaga is required to provide a 30-day notice to its borrowers for any adjustments in lending rates. Management is still guiding for Niaga’s NIM to ease to 5.0% for the full FY18 from 5.1% in 1QFY18. This has taken in account of the intense competition in loan rates and the subsidiary’s lower asset yield due to the tilt of its loan portfolio towards better quality borrowers. It is likely that there could be more pressure on the IDR from the broad market expectation of the US Fed rates climbing higher. In our opinion, the downside risk to NIM guidance of 5.0% for Niaga will be a further increase in interest rates in Indonesia.

• We understand that auto loans in Indonesia have been steady in 2QFY18. Niaga’s consumer loans excluding auto loans, SME and corporate loans in 2QFY218 have slowed down. Infrastructure loans in Indonesia, which Niaga has limited exposure to, are also slowing down in pace. Elsewhere, the loan momentum in Malaysia was better with consumer loans stronger than expected by the group while corporate loans were slow with the wait-and-see attitude by business borrowers. Nevertheless, July 2018 saw an improvement with some drawdown of approved business loans. We expect consumer loans in Malaysia to improve in 3QFY18 from the increase in consumer spending, taking advantage of the tax holiday (3-month period between the commencement of zero-rated GST and implementation of the SST). Another OPR hike of 25bps in Malaysia is not expected to occur in 2HFY18. In Singapore, we gather that loan growth has picked up pace towards the end of 2QFY18 while in Thailand, the subsidiary CIMB Thai posted a higher loan growth of 6.3%YoY in 2QFY18 vs. 5.1%YoY in 1QFY18.

• Management hinted of a potential slight shortfall on the group’s targeted NII which has been based on its ROE guidance of 10.5% for FY18. We are not making any changes to our forecast to reflect this as our ROE estimate for FY18 of 10.2% is already lower than management’s guidance of 10.5%. Meanwhile, on the group’s NOII (excluding one-off gains), management highlighted a significant slowdown in 2QFY18 due to a weaker capital market activities and lower trading income for securities while FX income was decent with the presence of market volatility. In our forecast, we have already factored in a lower NOII for FY18 by reducing our earnings estimate for the group in FY18/19 by 3.7%/4.7% in our earlier note in July 2018. Malaysia contributes a circa 70-80% of the groups’ NOII.

• Provisions are on track to meet the group’s credit cost guidance of 55-60bps for FY18. This will be an improvement from the 69bps recorded in FY17. In Malaysia, we understand that provisions have been steady while in Indonesia, credit cost is gradually improving with some recoveries edging towards meeting the guidance of 150 to 200bps for FY18. Meanwhile, there were also recoveries in Thailand with improvement in provisions on a QoQ basis taken in at the group level.

• We continue to expect the group to achieve an improvement in operating expenses from cost initiatives leading to lower CI ratio of 50.0% for FY18 (FY17: 51.8%). While we have seen optimization of cost and the potential improvements in income via partnerships with China Galaxy and Sompo, the unveiling of further cost management initiatives later, particularly in Malaysia and Indonesia to drive its CI ratio towards the mid-40s in the future, would not be a surprise.

• On the China Galaxy–CIMB Securities stockbroking business JV, it is now pending the approval of BNM for the sale of CIMB Group’s Malaysia cash equities business including the sale of 100% equity interest in CIMB Futures to Jupiter Securities. Approval from the central bank is expected to be obtained in 3QFY18 and this should complete its JV partnership for the both the Malaysia and International stockbroking business with China Galaxy by 4QFY18.

• Management has maintained the following guidance for FY18: Loan growth of 6.0%, NIM compression of 5-10bps and ROE of 10.5%.

Source: AmInvest Research - 26 Jul 2018