Highlights

• We attended a small group meeting with CIMB’s management yesterday. Below are the key takeaways.

• Malaysia: Key focus on loan growth. CIMB’s key focus in FY17 will be on growing loan growth in two areas, namely SME and transaction banking. NOII activity has been strong since 4Q16 due to robust deal flows in equity and fixed income buoyed by stabilization in economic growth and FX market. Outlook for NOII is bright in FY17 due to healthy pipelines.

• But…disruption on NIM. While management described current deposit environment as healthy, NIM may still take a hit should another round of competition on deposits occur. Management reiterated 5-10bps NIM compression in FY17, with bulk of this to be bogged by Niaga.

• Niaga: High provision will not be repeated. Management reiterated that the elevated provision will not be repeated with unchanged guidance on credit cost at 200bps-220bps. However, credit cost may remain toppish in coming quarters before easing to normalized level. As at April, management did not see any big movement in the special mentioned account (SMA) and NPL. From another perspective, firmer commodity prices since the start of the year will not translate into better credit cost as no writeback from this segment is expected. On NIM, management expected decent CASA growth in FY17 will come in handy to ease NIM compression.

• Thailand: Better 1Q17 result. Management expected credit cost to be lower in FY17 as majority of the issues were already addressed. However, it will still remain elevated during 1Q17 and 2Q17 before normalizing towards end of FY17. We expect CIMB Thai to deliver normalized profitability in FY17 in view of the moderate credit cost at 150bps. Management was hesitant to share whether the rice issue is completely over.

• Still mum on MFRS9. No update on MFRS9 impact as CIMB is still working on the modelling. However, judging from recent development, CIMB is beefing up its CET1 to meet the increase in loan provision.

Risks

• Further impairment in Singapore and Thailand, especially exposure in the oil & gas sector and not meeting CET1 ratio target.

Forecasts

• Unchanged.

Rating

HOLD ( ↔ )

• We opine that FY17 will be a year of further tweaking of business operation with priority of cost and capital optimization. Management’s guidance for a sustainable 40%-60% payout should entice the shareholders moving forward.

Valuation

• We maintain our HOLD rating on CIMB with unchanged TP of RM5.60 based on Gordon Growth model (ROE 9.3% and P/BV of 1.0x)

Source: Hong Leong Investment Bank Research - 20 Apr 2017