Highlights  

We attended a group meeting an update with the main focus on the mega merger  with RHB Cap and MBSB .

As  we  had  highlighted  in  our  previous  report,  k ey  challenge to  extract  synergy  and  long-term  ROE  enhancement  is addressing  the  huge  overlaps  within  CIMB ,  RHB  Cap  and MBSB as well as execution of integration.

Although  it  is  early  days  with  no  specific  guidance  on  cost synergy,  we  had  a  better  understanding  of  the  rational  and structure of the deal and take comfort from its track record in merger  integration.

Post-merger,  CIMB’s  intention  is  to  only  own  51-60% of the mega  Islamic  bank  despite  the  positive  growth  prospects . The  structure  essentially  enables  the  enlarged  entity  to transfer  some  of  the  duplications  to  the  non-wholly-owned Islamic  subsidiary .   Coupled  with  VSS  and  closing  down some  branches,  these  will  be  bulk  of  the  low  yielding  cost synergy (65% of total) the group  is targeting.

The  remaining  35%  cost  synergy  will  come  from  Singapore (additional  7  branches  from  RHB  Cap),  banca, IB (RHB Cap niche  in  small  and  middle  corporate  vs.  CIMB’s  large corporate  niche),  additional  retail  broking from RHB Cap and to narrow  funding  cost of MBSB.

On accounting treatment, it will reflect CIMB as the acquirer, thus,  goodwill  will  be  0.4x  RHB  Cap  book  and  th e  enlarged entity  CET1  of  9%  (9.5%  after  asset  rationalization)  has taken the goodwill into consideration.     

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.

Rating

TRADING  BUY

• 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. 22  (Gordon  Growth  with ROE of 12.1% and WACC of 9.8%).
• Despite  concerns  about  merger  dilution  and  duplication  as well  as  uncertainties  in  Indonesia,  we  believe  recent selldown  to  1.4x  FY14  book  has  been  over  exaggerated. Moreover,  it  is  now  a  cheaper  proxy  to the merged entity at RM8.56  (CIMB  share  price  of  RM6.20  x  1.38  exchange ratio)  vs.  RHB  Cap  share  price  of  RM8.74.   Upgrade  to Trading  BUY as values  emerged  amid uncertainties.

Source: Hong Leong Investment Bank Research - 29 Oct 2014