Results

3QFY14  net  profit  of  RM 890.3m  (-6.3%  qoq;  -16.1%  yoy) took  9MFY14  to  RM2,906.5m  (- 17%  yoy;  -7.4%  yoy  if exclude  the  RM515m  profit  from  sale  of  CIMB  Aviva  and RM150m net restructuring charges in previous year ) or  only accounted  for  66.4%  and  66.3%  of  HLIB  and  consensus forecast , respectively ,  below expectations .

Deviation 

Lower-than- expected  contribution  from  CIMB  Niaga  due  to significant  rise in  provision  (please refer to our report dated 30 Oct 2014 on CIMB Niaga’s 3QFY14  results release).

Highlights 

Results  mainly  impacted  by  CIMB  Niaga  given  challenging environment in Indonesia  as well as  IB which suffered  from lower  volume  and  lower  ECM  deal  flows.   Excluding  CIMB Niaga, the group’s 9MFY14 net profit  grew  by 6%.

For  4QFY14,  consumer  banking,  IB,  Treasury  &  Markets, Investments,  Malaysia  and  Thailand  are  expected  to  be stable  with  strong  growth  from  Singapore.  However, corporate  banking and Indonesia  remained  under  pressure.

Indonesia  asset  qualit y  remained  as  the  main  concern  as situation still fluid. May deteriorate  further in 4Q  but due to much lower expos ure to coal and coal- related companies, it expect  asset  quality  to  bottom  out  by  4Q14  or  1Q15. Meanwhile,  it  does  not  expect  the  recent  fuel  price  hike  to have  significant impact.   

Deal  pipeline  in  1Q15  better  and  strong  in  2Q15,  expect 1HFY15 to be stronger.  CIR expected to be slightly lower in FY14, Malaysia asset quality continued to improve and M&A with MBSB and RHB Cap will not impact  dividend  policy.   

Risks

Unex pected  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  forecast  cut  by  13%  to  reflect  the  jump  in  provision and  other  adjustments  based  on  guidance  while  FY15-16 fine-tuned  lower  by 2-3%.

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  lowered  to  RM 6.91  based  on  Gordon  Growth with ROE of 12.4% and WACC of  10.1%.   

Despite  conc erns  about  merger  dilution  and  duplication  as well  as  uncertainties  in  Indonesia,  we  believe  the  selldown to  1.4x FY14  P/B  has been over exaggerated.  Moreover, it is now on par with RHB Cap in terms of pricing  as a proxy to the  merged  entity.   Maintain  Trading  BUY  as  values emerged  amid uncertainties .

Source: Hong Leong Investment Bank Research - 19 Nov 2014