- We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB) with an unchanged fair value of RM6.85/share. This is based on rolled forward ROE of 11.2% for FY15F (vs. 11.9% FY14F previously) for the enlarged merged entity. Our new ROE generated a new fair P/BV of 1.2x FY15F (previously 1.3x FY14F) based on the Gordon Growth methodology. This is based on an estimated book value of RM7.93/share for FY15F (previously RM7.19/share for FY14F).

- All in, this leads to an unchanged fair value of RM9.50/share for the enlarged entity. Applying a share swap ratio of 0.72 RHB Cap share for every 1 CIMB share (based on 1 RHB Cap share for every 1.38 CIMB share), we derived a fair value of RM6.85/CIMB share for FY15F, unchanged from our earlier fair value estimate for FY14F.

- We have downgraded our net earnings forecasts for CIMB by -5.4% for FY14F, -16.0% (FY15F) and -12.6% (FY16F), mainly on prospects of slower non-interest income, and higher credit costs especially for CIMB’s 98%-held Indonesian subsidiary, CIMB Niaga.

- Recall that CIMB Niaga posted a large increase in credit costs to 227bps in 3Q, from 90bps in 2Q, and 51bps in 1Q. Credit costs have thus turned in higher than the earlier target of 80bps-100bps.

- CIMB Niaga has hinted that loan loss provision may increase in the quarters ahead, in order to raise back the loan loss cover buffer, which has dropped to 82.9% in 3QFY14, from 111.1% a year ago. We think there is also a possibility of more impaired loans cropping up due to fallout from the tighter liquidity situation in Indonesia.

- Thus, we think that credit costs for CIMB Niaga has yet to peak. Our new credit costs assumption is now 75bps (previously 58bps FY15F) for the group, assuming 150bps credit costs for CIMB Niaga, and 40bps for local operations for FY15F.

- For the group as a whole, we are also projecting non-interest income growth to be flat at -0.5% YoY (from +3.8% YoY earlier) for FY15F, given the ongoing subdued capital markets.

- Our new earnings base for FY15F is now substantially lower at RM4.2bil vs. RM4.9bil previously. We think this is reasonable, considering that CIMB’s 1HFY14 annualised net earnings was quite subdued at only RM3.9bil (vs. consensus’ RM4.3bil). Maintain HOLD on CIMB.

Source: AmeSecurities