- We maintain our HOLD rating on CIMB Group Holdings (CIMB), with a lower fair value of RM4.70/share (from RM6.30/share previously), as we roll-forward our base year to FY16F from FY15F. Our fair value is now based on a new ROE of 9.6% for FY16F (previously 11.2% FY15F ROE), leading to a lower fair P/BV of 1x (previously 1.3x).

- CIMB’s annualised 2QFY15 net earnings, trailed our forecast by 22.7% and consensus’ estimate by 29.2%. The 1H made up 37.7% of our estimate and 34.5% of consensus forecast for FY15F.

- The lower net earnings were mainly due to the inclusion of an exceptional one-off restructuring expense of RM316mil, in relation to its recently announced MSS exercise. Stripping off the one-off MSS item, annualised 2QFY15’s net earnings would be 0.7% below our forecast, and 9.1% lower than consensus estimate.

- Going forward, the company hinted that operating environment remains challenging with softer economic outlook and slower capital market activities regionally.

- It expects asset quality to remain the core focus in Indonesia and Thailand, while provisions are likely to remain elevated although not as high as seen in the previous quarters – subject to economic conditions.

- Given that credit costs ranged between 70bps to 80bps in 1HFY15, the company further hinted it may be a challenge to contain credit costs within the 40bps to 50bps target for FY15F.

- Looking ahead into next year, the company also alluded that normalised credit costs are likely to be closer to 35bps- 40bps. The 35bps-40bps reflects a normalised trend without the impact of good recoveries seen in recent times.

- To reflect the potential knock-on contagion effects from the recent macro uncertainty, we have downgraded our loans growth assumption for FY16F to 5.6% (from 7.6% previously). At the same time, we have also raised our credit costs assumption to 50bps from 36bps previously - – in line with our assumptions for other banks under our coverage.

- Recall that CIMB registered credit costs of 71bps in FY08 and 75bps in FY09, before easing to 38bps in FY10. This leads to an 8.4% downgrade in our net earnings for FY16F. We maintain HOLD.

Source: AmeSecurities Research - 1 Sep 2015