- We are downgrading our rating on CIMB Group Holdings Bhd (CIMB) to HOLD from BUY, with lower fair value of RM8.50/share (from RM9.50/share previously). This is based on ROE of 15.4% (vs. 14.4%) for FY13F, leading to fair P/BV of 2.0x (v.s 2.2x). This is our first rating downgrade on CIMB in a year.

- The company believes there is not much of a concern arising from the recent volatility in yields for the Malaysian Government Securities (MGS). To recap, CIMB’s securities held-for-trading portfolio amounted to RM28bil or 42% of total securities and 8% of total assets in end-March 2013.

- As for its securities available-for-sale, in which there is an unrealised gain of RM629mil as at end-March 2013, CIMB views this as a long-term buffer. CIMB has a total securities available-for-sale of RM30bil or 45% of total securities or 8% of total assets.

- CIMB views the recent movements as nothing out of the ordinary and does not expect much of a concern given that these are unrealised positions.

- Earlier in our banking sector report dated 27 June 2013, we have estimated that, assuming a duration of 4 years and a 40bps increase in yield, there may be unrealised marked-to-market loss of RM431mil for securities heldfor-trading, in the profit and loss.

- We have now adjusted downwards our non-interest income by RM431mil, leading to a net earnings downgrade of 6.9% for FY13F.

- Besides this, given recent market conditions in China and Hong Kong, we now expect some delays in the ex-ASEAN pipeline being worked on under the new RBS platform. In the 1Q briefing, there were indications that the enlarged platform (including RBS) was working on a growing exASEAN pipeline which included 8 China/HK IPOs.

- Our non-interest income downgrade of RM431mil leads to a now lower non-interest income of RM4.6bil, from our just recently upgraded non-interest income of RM5bil only two weeks ago (earlier upgraded from RM4.2bil). Our new forecast is in line with the earlier 1Q non-interest income which if annualised, came up to RM4.6bil. The RM4.6bil forecast for FY13F still exceeds FY12’s record noninterest income of RM4.4bil.

- Looking ahead, we would watch for better local and regional capital market conditions, which may prompt a re-rating of CIMB share price for the following reasons:- (a) better-than-expected non-interest income with further evidence of stronger pipeline from RBS operations; (b) stable overhead costs; (b) stable asset quality.

Source: AmeSecurities