Management sounded more optimistic in the briefing yesterday. Also, they kept their overall 2019 guidance. Hence, forecasts are unchanged as the underlying operational trends in 4Q19 are performing up to expectations. All in all, we turn positive on CIMB, expecting an introduction of a cash portion to its dividend payout (which should help to defend ROE better) and it provides one of the best values (pricing-wise) among larger banks. Upgrade to BUY and with a higher GGM-TP of RM5.70 (from RM5.25), based on 0.92x FY21 P/B.

Yesterday, CIMB held a pre-closed period meeting. Discussions revolved on its broad operational trends in 4Q19. Overall, management sounded more optimistic and kept its 2019 guidance: (i) 5-6% loans growth, (ii) 5-10bp NIM slippage, (iii) flattish cost-to income ratio at c.53%, (iv) 40-50bp net credit cost, and (v) 9.0-9.5% ROE.

Pick-up in loans growth. We understand 4Q19 loans growth momentum picked up some pace (3Q19: +5.6% YoY) due to chunky corporate drawdowns in Malaysia. Also, the robust infrastructure, SOE-related, and consumer lending fuelled stronger loans growth in Indonesia (3Q19: +4.9%).

Steady NIM. In Malaysia, we gathered 4Q19 NIM held up quite well (despite most deposits were repriced downwards in 3Q) given benign competition for deposits. As for Indonesia and Thailand, management shared QoQ NIMs were relatively stable. However, they also flagged that deposits rivalry in Indo remained fierce and Thai operations is subject to the ramp-up in business activities.

Robust NOII. Excluding the one-off RM176m NPL and foreclosed asset disposal gains in Indo and Thai respectively, QoQ non-interest income is seen to be robust in 4Q19. This is supported by the still strong trading and investment gains (the 10-year MGS yield has carried on to slide to 3.40% vs 3.47%/3.77%/3.94% in 3Q/2Q/1Q) coupled with better fee income from wealth management business and loan-related transactions.

Stable asset quality. In general, 4Q19’s asset quality stayed stable but NCC was guided to climb sequentially (3Q19: 45bp); this comes on the back of provisioning top up for 1-2 business accounts in Indo as their credit risks have increased. Separately, CIMB shared there were no asset quality stress at its mortgage books and they did not see any abnormal spike for its rescheduled and restructured loans, post introduction of the new credit risk guideline by BNM in Oct-19.

Investing for the future. Marketing expense in 4Q19 is expected to increase YoY, owing to higher Touch ‘n Go spending. Also, management shared the cost savings from FlexMyCareer locally and mutual separation scheme exercise in Indo will not be able to fully translate to bottom-line in 2020 due to reinvestment efforts.

Forecast. Unchanged since underlying operational trends in 4Q19 are performing up to expectations. CIMB Niaga targets to release its results on 14 Feb while the Group is reporting on 26 Feb.

Upgrade to BUY (from Hold) and with a higher GGM-TP of RM5.70 (from RM5.25), as we roll valuations to FY21 and recalibrate some of our GGM variables. The new TP is based on 0.92x P/B (from 0.88x) with assumptions of 8.5% ROE, 9.0% COE (from 9.5%), and 3.0% LTG. This is still below its 5-year mean and sector’s 1.00x; discounts are fair given its lower ROE, which is 1ppt beneath its 5-year and industry average. We turn positive on CIMB with a view that management will introduce a cash portion to its dividend payout (which should help to defend ROE better) and it provides one of the best values (pricing-wise) among larger banks.

Source: Hong Leong Investment Bank Research - 21 Jan 2020