News

• CIMB announced yesterday that it has signed agreements with Principal Financial Group (Principal) for the latter to gain additional ownership in the CIMB-Principal Asset Management Group (CPAM) and CIMB-Principal Islamic Asset Management (CPIAM).

Comment

• CIMB reduces stake. CIMB will pare down its stake to 40% (from 60% currently) in the entities while Principal will increase its stake to 60% (from 40% currently). CIMB is expected to recognise a gain on disposal of approximately RM950m and the transaction is expected to be completed in 2Q18.

• Neutral to core earnings... Principal will pay CIMB up to RM470.3m for the additional stakes, however we treat this as a one-off gain. The entities contributed RM105m to the CIMB’s PBT in FY16, and since the entities are no longer treated as a subsidiary, CIMB will lose ~2% to the PBT contribution. Nevertheless, the transaction is expected to lift CIMB’s CET1 by 18bps upon completion.

• Another transaction. We are not entirely surprised with the transaction as this in line with the Group's T18 targets which includes CET1 ratio of 12.0%. To note, CIMB already hit a 12% CET1 target during 9M17 results, and along with the potential uplift from the disposal of Bank of Yingkuo, this will put CIMB in a much stronger capital position due to the MFRS9 implementation that could impact its CET1 as high as 50bps. Overall, the disposal of assets will not have any material impact on the Group’s earnings.

• Neutral on the announcement. Overall, we are neutral on the announcement as asset management provide stable earnings to the Group. Given the favourable market performance for the AUM market in 2018, we felt that the proposed divestment is quite off-timing as we believe both entities are able to provide stable income to the CIMB.

Risks

• Slower loan growth, additional impairment in Singapore and Thailand.

Forecasts

• Unchanged as we treat the gain as non-recurring item.

Rating

BUY ( ↔ )

• We believe FY2018 could be a better year for CIMB as we are encouraged with the various improvements made to achieve its T18 target. Its credit cost remains a wild card due to ongoing improvement in the Niaga and CIMB Thai. Management’s guidance for a sustainable 40%-60% payout should entice shareholders moving forward.

Valuation

• We upgrade our TP to RM7.25 (from RM6.90) as our GGM derived P/BV is raised to 1.3x on lower COE of 11% (from 11.8%) and our valuation base is rolled forward to FY19. Our GGM-derived slightly above the P/B mean, reflecting the fast recovery in ROE of 9.7% in FY19. Maintain BUY.

Source: Hong Leong Investment Bank Research - 12 Jan 2018