We have revised down CIMB Group’s earnings as contribution from Indonesia and Thailand are not expected to be as robust compared to our previous assumptions, due to weaknesses in the domestic economy. We downgrade the stock to HOLD (from BUY), with PT revised to RM6.65 (at 1.25x P/BV target) as we trimmed our earnings forecasts. Its downside risk is largely capped by a sound domestic operations and regional expansion initiatives under the T18.

2017E-19E Earnings Forecasts Trimmed by 1.3-7.2%

There are not much exciting key takeaways from a recent meeting with management, the overall recovery and operating results seem to be slower-than-expected due to some pockets of weaknesses in the overseas units, namely Indonesia and Thailand. As such, we have trimmed our 2017E–19E net profit forecasts by 7.2%/ 1.3% /2.9% respectively (details of earnings revisions on page 4), as we pencil in a more modest growth expectations due to weaker consumer sentiment and lacklustre outlook for the commercial/SME segments in Indonesia and Thailand.

Key 2017 KPIs Likely Achievable With the Exception for Loan Growth

CIMB’s management expressed confidence of achieving a 9.5% ROE target, a cost-to-income ratio (CIR) of <53%, credit cost of between 60- 65bps (possibly on the higher end) and CET 1 ratio of >11.5% for FY17. Its loan growth target of 7% however is unlikely to be achieved.

2017 Credit Cost Guidance at 60-65bps; Still Cautious on Recovery

Management is maintaining its credit cost guidance of 60-65bps for 2017. Downside risks are emanating from Thailand, arising from the commodityrelated SME accounts (rice and rubber industries), CIMB Niaga’s auto and micro-SME/SME portfolio as well as the oil & gas sector in Singapore.

Downgrade to HOLD, PT Revised to RM6.65 From RM7.50

We downgrade our rating from BUY to HOLD on CIMB, with a revised Price Target of RM6.65 (at a P/BV target multiple of 1.25x on CY18 BVPS of RM5.30), based on a 2018E core ROE assumption of 9.2% and cost of equity of 8.4%, from RM7.50 (at a P/B target multiple of 1.4x). Overall, we believe that CIMB’s earnings outlook will remain steady, underpinned by: i) fund-based income growth of 2.9-3.5% p.a. based on loan growth of 1.8- 4.0%; ii) steady NIM at 2.6-2.63%; iii) a potential decline of 21% yoy in 2017E impaired loan allowances (credit cost at 64bps). Downside risks – further deterioration in asset quality, NIM pressure.

Source: Affin Hwang Research - 23 Oct 2017