-  We maintain our BUY rating on CIMB Group Holdings Bhd (CIMB) with a fair value of RM8.20/share. This is based on a possible mega-bank merger scenario whereby RHB Cap will likely acquire CIMB.

-  CIMB’s share price has drifted lower since the announcement of its 2Q results.

-  We believe this is may be due to subdued performance of its wholesale banking division (soft investment bank, treasury and markets divisions).

-  However, the one quarter performance is not a full reflection of the long-term franchise value of its wholesale banking division, which in our view, remains intact.

-  There may also be fresh rounds of concerns over corporate impaired loans in Indonesia, given that CIMB had alluded to this being one of its key challenges for Indonesia.

-  Taking this into consideration, we have revised upwards our group credit costs assumptions to 57bps, from 39bps previously for FY15F.

-  With this revision, we believe that our earnings forecasts for FY15F have already conservatively taken into account this fresh concern.

-  The other possible reason for the soft share price performance is the ongoing uncertainty over the proposed mega-bank merger with RHB Cap and MBSB.

-  Based on the latest merger assumption, we remain convinced that CIMB’s fair value should be at least RM8.20/share.

-  Even without the merger, CIMB’s valuation looks attractive on its own, as P/BV on a 1-year forward basis is only 1.5x.

-  This is well below its long-term mean of 1.7x (see chart in following page).

-  Thus, despite our conservative earnings forecasts and fresh rounds of concerns, we believe that CIMB’s valuation looks highly attractive with a P/BV of only 1.5x for a big-cap banking stock.

-  CIMB had earlier provided further details on its latest dividend reinvestment scheme (DRS). This is in relation to its latest interim single-tier dividend of 10sen. The issue price for the new CIMB shares to be issued pursuant to the DRS has already been fixed at RM6.78 – a valuation of only 1.4x P/BV.

Source: AmeSecurities