- We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB), with a lower fair value of RM7.80/share (from RM8.20/share previously) for FY14F. This is based on a lower FY14F ROE of 13.0% (vs. 13.3% previously) and a lower fair P/BV of 1.7x (from 1.8x).

- The lower fair value is due to a downgrade in our net earnings by 2.6% for FY14F, to account for a higher credit cost assumption of 57bps (previously 50bps) for FY14F.

- In its most recent 3QFY13 results, CIMB Niaga experienced higher gross impaired loans which increased by 13.6% QoQ. This led to a higher gross impaired loans ratio of 2.8% in 3QFY13 compared to 2.5% in 2QFY13.

- CIMB Niaga’s higher impaired loans were attributed to a generally slower repayment profile across the board for its portfolio including its retail segment, as well as widening of its impaired loans criteria. Thus, CIMB Niaga recorded credit costs of 98bps in 3QFY13 compared to 49bps in 2QFY13.

- Looking ahead, CIMB Niaga has alluded to credit costs of 80bps to 100bps for FY13F. The company hints that the overall trend for NPL will likely be more certain over the next two quarters.

- In the past, CIMB Niaga’s credit costs ranged between 120bps to 220bps from FY06 to FY10, before improving to 72bps in FY11 and 84bps in FY12 (see Chart 2 in following page).

- CIMB Niaga’s loan loss provision contributed the bulk of CIMB Group’s loan loss provision in recent years (see Chart 2 in following page).

- Looking ahead, we now forecast higher credit costs for CIMB Niaga at 150bps (from 80bps previously) for FY14F and 120bps for FY15F.

- As for CIMB group, the company is maintaining its overall credit costs target at 40bps for FY13F, in line with our forecasts.

- With the revision to our forecast for CIMB Niaga, we have thus revised upwards our credit costs assumption to 57bps (vs. 50bps previously) for FY14F. This is assuming credit costs of 30bps for the Malaysian operations. Maintain HOLD.

Source: AmeSecurities