Post management meeting, we reiterate our neutral view on CIMB in FY18. Management painted challenging outlook, especially on NII and NOII contribution. NII is at risk due to persistent NIM pressure in Niaga, whilst weak DCM and ECM activities post-GE14 are expected to continue until firmer economy direction. Nevertheless, subdued operating income will be partly mitigated by well contained opex and slowdown in provision. Maintain our earnings forecasts, TP of RM5.80 and HOLD recommendation.

We had a meeting with CIMB management yesterday for its routine pre-results announcement meeting. Below are the key meeting takeaways.

Loan growth at risk. Coming into 2Q18 results, 6% loan growth is at risk due to weakness from ex-Malaysia. So far, only Malaysia’s loan book showed positive traction while regional loan growth remained subdued, as loan growth in Indonesia and Thailand operations remains plagued by issues in auto and SME segments.

Malaysia loan book tilted towards retail based. Amid heightened uncertainties post-GE14, the dynamic of loan composition in Malaysia has shifted to more retail based (benefiting from the tax holiday period which has boosted consumer sentiment). Business loan momentum has slowed down considerably and it will remain soft for the rest of the year, until clearer economy direction. We expect retail loan to fill up the gap left by corporate loan, and this supports management’s optimism in beating system loan growth (our assumption 4.5-5.0%).

NOII off target. We believe NOII in 2Q18 will come in weaker (both YoY and QoQ), as corporates in Malaysia delayed investment decisions and fund-raising activities, while trading activities were hit amidst rising uncertainties post GE14 (CIMB derives 70% of its NOII from Malaysia).

Watching IDR movement. Management is monitoring closely the movement of IDR which has depreciated since early of this year. Further depreciation of IDR will dampen Niaga’s earnings translation into CIMB Group and ultimately hit CIMB earnings and capital.

NIM remains under pressure. Margin pressure is putting CIMB’s NII under threat for the rest of FY18. NIM will compress by 5-10bps in FY18, emanated almost entirely from Niaga as it is inability to reprice its loan yield immediately after the rate hike announcement. In other markets, NIM is under control, particularly in Malaysia which was boosted by rate hike effect in Jan-18.

All in… We may see muted 2Q18 results before it starts to pick up in later part of 2018. Flat operating income (arising from subdued NII and NOII) will be partially offset by well contained opex and deceleration of allowance for provision in all markets.

Forecast. No change to our forecast. To note, we have already lowered our earnings forecast (refer our report on 2 July 2018) to reflect the heightening volatility post GE14.

Maintain HOLD, TP: RM5.80. Maintain HOLD recommendation with unchanged TP of RM5.80 based on GGM valuations of (i) COE of 13.5% (ii) WACC of 10.1%. Post GE14, we believe CIMB loan growth target of 6% is achievable given the pickup in retail loan, which will mitigate the slowdown in business loan. Coupled with slowdown in other markets, we believe 6% loan growth target appears achievable.

Source: Hong Leong Investment Bank Research - 26 Jul 2018