News

CIMB announced that it has completed a book building exercise which entails issuance of 500m new shares via private placement at RM7.10, raising RM3.55bn.

The issue price is circa 2% and 3% discount to VWAP on 10 Jan of RM7.26 and 5-day VWAP of RM7.34, respectively.

Group Chief Executive, Dato’ Sri Nazir Razak said that the sharp depreciation of Rupiah in 2013 has set back its capital accumulation plan.

Financial impact

Proceeds will boost FY14-15 net profit by 1.3-2.5% but new shares will dilute EPS by 5.1%-4%.

The Group’s CET1 will be boosted by 1.5%-pt from 8.2% as at Sep 13 to 9.7%.

Pros / Cons

We are neutral on the private placement. Although its capital ratios will be stronger, there will be EPS dilution.

While market may be speculating that this is a prelude to another acquisition, we doubt so given that although RM3.55bn is a sizeable amount, it is still relatively small to make any acquisition that will be impactful to the group.

We are giving the management benefit of the doubt i.e. it is to boost capital ratio following the sharp depreciation of the Rupiah. Moreover, given the various rate hikes since the middle of 2013, asset quality in Niaga may continue to show uptick. Note that during the analyst briefing for its 3QFY13 results announcement, management highlighted that the uptick in Niaga’s asset quality is anticipated and it expects more to come but it is not overly concerned about the situation given that the group has already turned cautious and conservative in early 2013. Thus, with the additional capital, the group is in much better position to weather any potential weakness in Niaga.

Catalysts

Gaining more traction in cost rationalization, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

FY14 and 15 net profit raised by 1.3% and 2.5% but EPS cut by 5.1% and 4%, respectively, after incorporating the proceeds and new shares.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform.

Negatives - Non-interest income may fall short if capital markets soften and impact from higher Indonesia interest rate.

Valuation

Target price cut to RM7.81 from RM8.28 (Gordon Growth with ROE of 14.2% and WACC of 11.1%) or 5.7% after incorporating the private placement.

Source: Hong Leong Investment Bank Research - 15 Jan 2014