Again, the briefing yesterday lacks material positive vibes to persuade us to be more bullish on the stock. Overall, CIMB reiterated its 2019 guidance. Forecasts are unchanged as the underlying operational trends in 2Q19 are performing up to expectations. For now, the stock’s risk-reward profile is still balanced despite its seemingly inexpensive valuations (trading at -1SD to its 5-year mean P/B and P/E) given the downside risk to consensus FY19-21 earnings projection (ours are more conservative). Maintain HOLD and GGM-TP of RM5.45, based on 0.91x FY20 P/B.

Yesterday, management hosted a pre-closed period meeting. Discussions revolved on its broad operational trends in 2Q19. Overall, CIMB kept is 2019 guidance: (i) 6-7% loans growth; (ii) 5-10bp NIM slippage; (iii) flattish cost-to-income ratio (CIR) at c.53%; (iv) 40-50bp net credit cost; and (v) 9.0-9.5% ROE. However, they warned that their CIR and ROE targets may be difficult to achieve, despite being on track for now.

Extraordinary items. Management shared that there will be several one-off items in the upcoming 2Q19 results: (i) MFRS9 enhancement, which leads to expected credit loss writebacks but there will be a negative net interest income drag due to downward effective interest rate adjustment, and (ii) >RM200m disposal gain from the process of Malaysia stockbroking business transfer. Collectively, it will be a net positive for CIMB.

Healthy lending trend. We gathered that 2Q19 loans growth momentum continues to be robust (1Q19: +7.6% YoY) as locally, CIMB is still taking market share away from peers (but slowing down; 1Q19 domestic loans growth: +7.7%) while in Indonesia, it maintained its acceleration (1Q19: +4.9%) and sees an improving auto book in 2H19.

NIM still contracting. In Malaysia, there will be a slight 2-3bp hit to NIM, no thanks to the recent OPR cut. However, deposit competition appeared to have stabilized. As for Indonesia, NIM pressure was relieved a little by a higher yielding loan mix but cost of funds remained on the rise given the lack of liquidity in the system.

Other findings. On a YoY basis, it seems like 2Q19 non-interest income is poised to be better on the back of higher trading and investment gains. That said, fees from deals stayed subdued despite a healthy pipeline. Also, fee income from the likes of unit trust continued to moderate. Besides, management expects another OPR cut in 2H19. Lastly, CIMB reiterated that when its CET1 ratio hits 13.0% (1Q19: 12.8%), the current dividend reinvestment scheme may be reviewed to introduce a cash element (similar to Maybank’s dividend structure); this in turn should bode well for its future ROE generation.

Forecast. Unchanged since there were no material positive updates from the briefing. Also, underlying operational trends in 2Q19 are performing up to expectations. CIMB Niaga targets to release its results on either 13 or 14 Aug while the Group is reporting on 29 Aug.

Retain HOLD and GGM-TP of RM5.45, based on 0.91x 2020 P/B with assumptions of 8.7% ROE, 9.3% COE, and 3.0% LTG. This is below its 5-year mean of 1.03x and the sector’s 1.11x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath its 5-year and industry average. Also, this helps to explain the reason for trading at -1SD to its 5-year mean P/B and P/E. Hence, despite its seemingly attractive valuations, the stock’s risk-reward profile remains balanced. Moreover, we think there is still scope for FY19-21 earnings downgrade by consensus (ours are 2-7% lower).

Source: Hong Leong Investment Bank Research - 25 Jul 2019