The CIMB Group is disposing a 50% stake in CIMB Securities International (its regional stockbroking unit) to China Galaxy Securities to form a 50:50 JV. The move is expected to result in a potential gain of RM180m, open doors to more capital market deals and enhance its level of customer service. Maintain BUY, with PT raised from RM7.00 to RM7.50 (at 1.4x P/BV target).

Strategic Partnership Through 50:50 JV With China Galaxy Securities

The CIMB Group had on 6 June 2017 agreed to sell a 50% stake in its wholly-owned unit, CIMB Securities International Pte. Ltd. (CSI) to China Galaxy International Financial Holdings Limited’s wholly-owned unit, China Galaxy Securities Co. Ltd. (“China Galaxy”) for SGD167m (RM515m), based on a 1.3x CSI’s consolidated net asset value of SGD256.9m as at 31 Dec15. The sale will enable both CIMB and China Galaxy to enter into a strategic 50:50 JV. Currently, CSI is CIMB’s stockbroking business outside of Malaysia, comprising institutional and retail brokerage, equities research and associated securities business across Indonesia, Singapore, Thailand, HK, South Korea, India, UK and US.

Potential Gain From Sale of RM180m, Uplift of 100-150bps in CIR

The disposal of stake is expected to be completed by end-2017 or early- 2018, after obtaining regulatory approvals. The CIMB Group is expected to book-in a potential gain amounting to RM180m (including a direct realized gain on disposal and revaluation gains from the remaining stake held). The CIMB Group will also see a benefit of 100-150bps in cost-to-income ratio (from our forecast of 51% for 2017-19E, as revenues and costs from CSI will be deconsolidated.

Maintain BUY, PT Raised to RM7.50 From RM7.00

Reiterate BUY on CIMB. We Raise Our Price Target From RM7.00 to RM7.50, based on a P/BV multiple of 1.4x (from 1.3x) and a 2018E ROE of 9.6%. Our target multiple of 1.4x is in-line with CIMB’s past five-year average of 1.4x while the higher multiple is justified by an improving macro outlook, likely further upside from asset quality improvement and synergies from the JV with China Galaxy (new investment banking deals, improved trading platform, more extensive equities distribution platform and research coverage). Our earnings assumptions: i) steady NIM above 2.6% (vs. management’s guidance of <2.6%); ii) 2017-19E loan growth target of 6- 7%; iii) fund-based income growth of 5-6% p.a; and iv) credit costs at 53- 56bps 2017-19E (vs. 74bps in 2016).

Source: Affin Hwang Research - 7 Jun 2017