Having witnessed a sequential improvement in its quarterly earnings last year, we expect CIMB’s financials to improve further in FY18. Asset quality issue is now easing with the stable performance of overseas and domestic asset quality. We expect NIM compression to be mitigated by higher loan growth, improving credit cost, improving overseas contributions, and robust NOII. Our forecast is unchanged and we maintain our BUY rating with unchanged TP of RM7.90 (COE: 10%, WACC: 8.7%).

Poised to Record a Better Year. FY17 was indeed a recovery year for CIMB thanks to meeting its ROE target, recovery of overseas contribution and lower provisions. Entering into FY18, CIMB introduced more aggressive targets, which include (i) ROE of 10.5%, (ii) loan growth of 6% (iii) CTI of 50% and (iv) CET1 ratio of 12%. We see the targets to be within CIMB’s reach underpinned by improving credit cost and recovering overseas contributions.

Revival of Overseas Contribution. We expect contribution from overseas operations to remain stable (if not improving further). We believe Niaga will continue to record earnings improvement, underpinned by a declining credit cost (albeit gradually, management guided a credit cost range of 150-200bps in 2018 vs. 220 bps in 2017), and improving loan growth thanks to a shift in its loan portfolio (from auto loans to more mortgage and SME loans). While asset quality currently remains the main issue for CIMB Thai, we believe this issue will soon be addressed with the sale of NPLs, and more efficient risk management policies.

Stable Domestic. Domestic operations are expected drive CIMB Group’s earnings again in FY18. CIMB is expected to deliver in the space of consumer banking and wholesale banking. In consumer banking, residential and unsecured personal are the segments that remain profitable to CIMB. In the wholesale segment, judging from pick up in the capital market activities (in both the DCM and ECM space), CIMB is in the front footing to benefit from this.

Asset Quality Concern Easing. Malaysian operations’ asset quality remains healthy with no significant deterioration detected. Whilst in Thailand, the sale of NPLs are expected to lower its NPL ratio. In Niaga, management guided a lower credit cost of 150bps-200bps. Overall credit cost is expected to improve to 60bps (from 69bps bps in FY17) despite the implementation of MFRS9. CIMB is expected to trim its cost further as it is vying to achieve 50% CTI in FY18.

M&A Spree Again? Having improved its CET1 target through several disposals (which include the disposal of BOYK and stake sale of CIMB Principal YTD), we do not see the need of another potential disposal. The key focus now is to extract revenue synergies from the recent disposal as CIMB Principal’s contribution is reduced to an associate level.

Forecast. No change to our forecast.

Maintain BUY, TP: RM7.90. We are optimistic that CIMB is poised to post another round of better performance in FY18 (although management’s guidance was somewhat conservative, in our view), benefitting from the tail end of its T18 strategy that ensures further earnings recovery and ROE expansion. We maintain our BUY rating with unchanged TP of RM7.90 based on (i) COE of 10% and (ii) WACC of 8.7%.

Source: Hong Leong Investment Bank Research - 12 Apr 2018