- We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB) with an unchanged fair value of RM6.85/share. This is based on ROE of 11.2% for FY15F, and an estimated book value of RM7.93/share for the enlarged merged entity. Our fair P/BV is unchanged at 1.2x FY15F.

- 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 an unchanged fair value of RM6.85/CIMB share for FY15F.

- CIMB’s annualised 3QFY14 net earnings came in at only RM3.9bil, or about 6.5% below our forecast and 14.0% below consensus estimate of RM4,414mil for FY14F.

- The main area of shortfall was the higher-than-expected loan loss provision, especially for CIMB Niaga, and lowerthan-expected non-interest income lines. The 9MFY14 made up 71.6% of our and 65.8% of consensus forecasts for FY14F.

- Annualised loans growth was 8.5%, below the earlier targeted 14%, due to ongoing redemptions and repayments. Notably, annualised deposit growth was soft, at only 0.7%, due to intensified competition. With deposit growth lagging behind loans growth, loan-todeposit

(LDR) for the group had climbed to 94.7% in 1QFY14, compared to 89.7% in 2QFY14.

- NIM was flattish QoQ on a normalised basis. The 3Q would have included the 25bps rate hike effective from 10 July 2014. Considering there was also higher utlisation of LDR, we believe the flat NIM trend may be due to rising cost of deposit.

- Otherwise, the company expects possibly further deterioration in asset quality in Indonesia ahead in 4QFY14. The company hinted that the IB deal pipeline outlook remains soft in 4QFY14, and is likely to remain challenging in 1QFY15. The outlook looks better though in 2QFY15, but the company cautioned that this depends on timing of realisation of mandates.

- In terms of outlook by countries, CIMB expects Malaysia to be steady, but Indonesia remains very challenging. In addition, CIMB stated that its FY14 ROE targets will not be met. We believe the latest set of results indicate that that the two key variables to net earnings, i.e. credit costs in Indonesia, and slow non-interest income, may continue

Source: AmeSecurities