-  We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB), with a lower fair value of RM8.20/share (vs. RM8.50/share previously) as we roll forward our base year to FY14F. The fair value is based on an FY14 ROE of 13.3% (vs. FY13’s 14.4%), with a lower fair P/BV of 1.8x (from 2.0x).

-  CIMB’s foreign shareholding has dropped significantly to 37.9% as at end-August 2013, from 40.6% at end-July 2013. This is the lowest in 18 months since February 2012’s 37.3%.

-  The net number of shares sold by foreign shareholders is estimated at 206mil in August 2013. This was higher than the amount sold in July 2013 at 30mil, and signifies the second consecutive month of net selling by foreign shareholders (see Chart 1 in following page 2).

-  This means that, for the year to end-August 2013, there was a net selling by foreign shareholders, of 116mil, compared to FY12’s net buying by foreign shareholders of 37mil.

-  Despite the recent drop in foreign shareholding and CIMB’s share price, we believe it is too early to turn positive on CIMB.

-  The key challenge is likely to be weakening regional markets. Earlier at the analysts’ briefing, CIMB hinted at an overall weakening external macro-economic environment and markets. It hinted that the Treasury Markets would have to navigate market turbulence but to also capitalise on new opportunities.

-  Further, it alluded to CIMB Niaga being expected to be watchful on asset quality given the depreciation of the Rupiah, rate increases and a generally slower Indonesian economy. CIMB is maintaining its ROE target of 16% for FY13F although it did hint that it may be a challenge to achieve it currently.

-  We believe the main risk is negative feedback loop in the current economic slowdown, which may lead to higher loan loss provisions and credit cost ahead. We have revised our credit cost assumption for FY14F to 50ps from 35bps previously (FY13F: 40bps). This leads to a 5.7% downgrade in our FY14F net earnings. Our revised ROE for FY14F is lowered to 13.3% from 14.1% previously.

-  The factors which may lead to a rerating are:- (a) stabilisation of Indonesian macro situation and assurance on asset quality; (b) confirmation of minimal marked-tomarket losses for its securities portfolio; (c) indication of better capital markets which would be positive for its investment banking pipeline.

Source: AmeSecurities