Highlights

• CIMB Group signed a heads of terms with China Galaxy International Financial Holdings Ltd (CGI) to explore a strategic partnership (50:50 JV) in the stockbroking business comprising institutional and retail brokerage, equities research and associated securities businesses and to identify further areas of co-corporation in the relevant markets where they operate.

• Through this exercise, CIMB’s stockbroking business will be repositioned as a pure play brokers with client base of a universal bank, where, CIMB will continue to offer investment banking and capital market products and services to its clients while the JV will operate the stockbroking business, providing equity distribution platform and research services to complete and support CIMB’s fully owned investment banking and capital market businesses.

Comments

• While details remain sketchy, CIMB will be in advantageous position to capitalize on China-outbound M&As and other capital market activities through enhanced synergies and cross-selling opportunities, as well as benefit from China’s focus on infrastructure development projects, which will facilitate growth, consumption and capital flows into the region.

Risks

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

Forecasts

• Maintained. In any case, impact will likely be immaterial given CIMB Group’s large earnings base.

Rating

HOLD 

• 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 RM4.52 (based on Gordon Growth with ROE of 9.3% and WACC of 10.1%)

Source: Hong Leong Investment Bank Research - 18 Oct 2016