News

• CIMB Group Holdings Berhad (CIMB) and China Galaxy Securities Co. Ltd. announced today that they, through their wholly-owned subsidiaries CIMB Group Sdn Bhd and China Galaxy International Financial Holdings Limited (“CGI”) respectively, have signed a share purchase agreement to formalise their strategic partnership across CIMB’s stockbroking business.

Comment

• Positive on the news… We are positive on the latest development, as the divestment of its stockbroking stake to CGI will enable CIMB to achieve further saving in its overhead expenses. We project CIMB cost-to-income ratio (CIR) will improve by 100 to 150bps or RM300-350m in FY18 onwards based on cost of run-rate about RM600m RM700m with minimal impact to its CIR in FY17.

• Impact to earnings…. Stockbroking contribution has been volatile in the past with a loss of –RM30m in FY15 but recovered to a profit of RM20m in FY16. We project modest additional earnings contribution of RM10m-RM15m in FY18 onwards.

• Price tag… CIMB will receive a purchase consideration of RM515m for the 50% of its stockbroking stake, which will boost its CET1 by 30bps to 11.8% from 11.5% as at Mar-17. This places the group in a strong position to achieve its targeted 12% CET1 by 2018.

• Synergies… Post-acquisition, CIMB will focus its efforts in investment banking, capital market products and services whilst the China Galaxy JV will be positioned as a pure play stockbroker with universal bank client base.

Risks

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

Forecasts

• We fine tune our FY17, FY18 and FY19 forecast to impute the cost savings of RM350m at best scenario. FY17-FY19 earnings forecasts are raised by 2.3%, 3.1% and 2.9% respectively.

Rating

HOLD ( ↔ )

• We strongly feel 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

• Post earnings adjustment, we maintain our HOLD call but raise our TP to RM6.30 (from RM5.93). Our TP is derived from GGM model based on i) WACC of 9.2% ii) ROE of 9.7% (from 9.4%).

Source: Hong Leong Investment Bank Research - 7 Jun 2017