Highlights

• CIMB held a meeting with analysts ahead of its close period for 4QFY17 results (due Feb).

• Preview of 4Q17. We do not expect any major surprise from the upcoming 4Q17 results. KPIs are likely to be in line with FY17 guidance except for loan growth that is likely to fall short. Based on the meeting, we believe CIMB’s worst is behind them, especially for Niaga and CIMB Thai.

• Loan the disappointment. Management shared that the expectations of stronger corporate loans in 4Q17 did not materialize, however the pipeline remains good. This was contributed across the board purposes in corporate segment whilst demand for retail loan remains positive, fuelled by residential mortgage loan. All in, management reiterated of subdued loan growth in 4Q17.

• NIM to compress in 4Q17. Having deteriorated by 11bps QoQ in 3Q17, management expects NIM compression from Niaga to again drag CIMB’s overall NIM. However, we feel that the compression won’t severely impact its overall NIM in FY17. In FY18, management views that NIM will continue to compress at a slow pace but this will be partially offset by the recent OPR hike and higher NIM at CIMB Thai.

• NOII is stable. CIMB sees that capital market activities (debt and equity) have picked up since 3Q17 whic h should translate into higher NOII in FY17.

• Asset quality beefs up. There was no upset in Niaga’s credit cost. We believe credit cost of 60-65bps on a group level remains achievable. Additionally, there was no significant sign of weakness in residential and commercial property in the Malaysia operation.

• MFRS9. Management is still guiding a 50bps impact to capital ratio with the utilization of regulatory reserve. However if BNM changes their stance on the regulatory reserve usage, management expect additional 15-20bps impact to capital.

Risks

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

Forecasts

• Unchanged.

Rating

BUY ( ↔ )

• CIMB is poised to report further earnings improvement in the upcoming 4Q17. We remain optimistic on CIMB recovery owing to its T-18 initiatives that will further drive its ROE recovery. That said we believe CIMB is warrants to trade higher P/B during earnings recovery phase compared to mean of 1.3x P/B.

Valuation

• We are lowering our COE to 10% (from 11% previously) to reflect its robust earnings growth and ROE recovery. Correspondingly, our TP is raised to RM7.70 (from RM7.25). Our TP was derived from i) COE of 10% and ii) ROE of 10%. Maintain BUY.

Source: Hong Leong Investment Bank Research - 2 Feb 2018