Highlights

Given the difficult operating environment in Indonesia, group will be challenged to meet its FY14 ROE KPI of 13.5% as CIMB Niaga contributed about 30% of FY13 PBT.

CIMB Niaga is still faced with intense competition (especially on liquidity) which is like to impact NIM while the significant interest hikes in 2013 is expected to continue impact asset quality. Although NIM has held up well in 1HFY14, it is expected to decline by 30bps in FY14. As for asset quality, it is expected to continue inch higher and credit charge is likely to be at the higher end of 80-100bps guidance (vs. 71bps in 2Q and 52bps in 1Q). Thus, CIMB Niaga is expected to continue drag the group’s overall earnings.

Despite CIMB Niaga’s NIM and credit cost outlook, group’s NIM is only expected to decline by 10-15bps as the margins in Singapore, Thailand and Malaysia are stable. The latter could see some improvement from higher ASB loans, HP rate hike, liabilities optimization since 2013 and the marginal positive impact from the recent OPR hike by BNM. Group credit cost guidance of 35-40bps also intact.

In terms of revenue, loans growth will be dragged by CIMB Niaga while IB pipeline remained weak.

CIR likely to remain elevated despite its successful cost optimization program given that revenue from CIMB Niaga and IB is not forthcoming.

Mega merger main agenda is to fortify/solidify home base as the launch pad for regionalization.

As for the Philippines, it is still interested for an M&A given that it is now clear foreigners can hold 100% of the local institution there. However, any deal is expected to be relatively small.

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

Unchanged for now pending review (with downside bias) after CIMB Group results announcement in Aug.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform and the new core banking system (1Platform).

Negatives – Impact on non-interest income if capital markets soften and impact on asset quality from higher Indonesia interest rate.

Valuation

Target price remained at RM7.74 (Gordon Growth with ROE of 13.7% and WACC of 10.5%). Although total potential return is >10%, maintain Hold rating as uncertainties in Indonesia to continue hog price in short-term.

Source: Hong Leong Investment Bank Research - 1 Aug 2014