The meeting yesterday has yet again concluded on a muted tone. There were some changes to its 2019 guidance but ROE target of 9.0-9.5% was intact. Thus, our forecasts were left unchanged since there will be some offsetting effects in play. Overall, there is opportunity to trade the stock at this price level (purely on inexpensive valuation grounds), but we are not inclined to upgrade CIMB as it lacks re-rating catalysts and there are better banking picks in the sector. Also, it has a relatively high foreign shareholding (>25%), making it more susceptible to sell-off vis-à-vis other bigger local banks. Retain HOLD and GGM-TP of RM5.45, based on 0.91x FY20 P/B.

Yesterday, CIMB held a pre-closed period meeting. Discussions touched on its broad operational trends in 3Q19. Overall, there were some changes to its 2019 targets: (i) 5-6% loans growth (vs 6-7%), (ii) >53% cost-to-income ratio (CIR; vs flattish), and (iii) <40bp net credit cost (NCC; vs 40-50bp). That said, its 5-10bp NIM slippage guidance was kept and management is confident to achieve 9.0-9.5% ROE this year.

Softer loans growth. 3Q19’s loans growth momentum is seen to taper (2Q19: +6.9% YoY) due to muted Malaysian corporate lending and chunky repayments. However, local consumer and SME loans acceleration remained robust (2Q19: +6.1% and low- 20% respectively). In Indonesia, business loans saw demand picking up while its auto book contraction has halted (2Q19: +2.6%).

Higher opex. CIR (1H19: 53.2%) is expected to rise in 3Q19 on the back of higher opex, given the increase in digital spending and marketing costs.

Lower NCC. In general, 3Q19’s asset quality stayed stable and thus, NCC is guided to be <40bp (1H19: 35bp); CIMB reiterated the single bad customer account relating to the commodity sector in Indonesia has been adequately provided for.

NIM to improve. The downward deposit repricing in Malaysia is likely to lift overall group NIM in 3Q19 (2Q19: -11bp). Also, local deposit competition is benign but we gathered it has been intense in Indonesia. Hence, there will be some NIM pressure at Niaga (2Q19: +25bp) coupled with the effect of 3 successive months of rate cuts by Bank Indonesia (July-Sept 2019).

Other findings. Non-interest income in 3Q19 is expected to repeat a good sequential showing (chalked in RM1.1b in 2Q19) given better fee income as CIMB completed an IPO deal while sustaining its strong trading and investment gains. Besides, there will be one-off positive impact (<RM250m) from disposing some of its commercial NPL in Indonesia. Also, CIMB reiterated that when its CET1 ratio hits 13.0% (2Q19: 12.9%), the current dividend reinvestment scheme will be reviewed.

Forecast. Unchanged although there were changes in guidance. Essentially, we see the higher opex being neutralized by lower NCC; Niaga will be releasing its results on 31 Oct while the Group is reporting on 27 Nov.

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 and sector’s 1.00x. The discounts are warranted due to its lower ROE, which is 1ppt beneath its 5- year and industry average. Although we think there is opportunity to trade the stock at this price level (purely on cheap valuation grounds), we are not inclined to upgrade CIMB as it lacks re-rating catalysts and there are better banking picks in the sector. Also, it has a relatively high foreign shareholding (>25%), making it more susceptible to sell-off vis-à-vis other bigger domestic banks.

Source: Hong Leong Investment Bank Research - 25 Oct 2019