Highlights

• No plan to raise capital. Despite its lower than peers’ CET1 ratio, management is of the view that its current capital is sufficient to support or sustain existing operations. Moreover, it has put in place several initiatives to optimize risk weighted assets.

• Asset quality to remain intact. Although provisions in Indonesia will likely remain elevated in 2016, it would come in lower compared to 2015, with the weakness confined within the commodity segment. For Malaysia, management expects a slight deterioration in asset quality (particularly, within the retail segment), given the economic sentiment and limited room for further improvement (as IL and provisions already at low levels).

• NOII to remain subdued in 4Q15… With weak equity and bond market performance to be offset by improved performance from the FX market (due to seasonality and increased volatility).

• Overhead expenses. The recent rationalization of its operations in Hong Kong will not have a significant impact on CIMB’s overhead expenses. However, there are still areas to be reviewed further, particularly in the non-ASEAN operations. For 2015, management is keeping to its cost income ratio (CIR) of 55%. For 2016, management hinted that it should not deviate significantly from 2015, as it is looking to contain cost growth of 3-4% for 2016.

Catalysts

• Gaining more traction in cost rationalization or T18 initiatives, 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, pending results scheduled in end-Feb.

Rating

• Trading BUY

Positives

• Proxy to economic growth and capital markets as well as growing regional universal bank platform, new core banking system (1Platform) and new T18 initiatives.

Negatives

• Impact on non-interest income when capital markets soften, impact of asset quality deterioration in Indonesia and legacy high cost structure.

Valuation

• Target price maintained at RM5.20 based on Gordon Growth with ROE of 10.3% and WACC of 10.1%. We note that share price performance of CIMB may remain lackluster in the near term, given the weak sentiment. We believe interests on the stock will reignite when re-rating catalyst emerges (among others, improved investment sentiment, improved performance from Indonesian operations and/or return of foreign interests), given its compelling valuations.

Source: Hong Leong Investment Bank Research - 21 Jan 2016