2017 net earnings was up 25.6% yoy (in line with our and consensus estimates) driven by improved operating income and lower provisions as well as impairments. Results were in-line with Affin and street’s estimates. There will be one-off gains from the sale of stakes in CIMB Principal (RM950m) and CIMB Securities International (RM150m) (under the JV with China Galaxy Securities) in 2018E. Nonetheless, the positive gains to the group could be tempered by the risk of NIM pressure and potentially elevated provisions in Indonesia and Thailand. Maintain HOLD. We raise our PT from RM6.65 to RM7.30 (based on 1.38x P/BV target) as we revise FY18-10E earnings by 3-25%.

2017 Headline Net Profit +25.6% Yoy; in Line With Expectations

CIMB Group’s 2017 net earnings of RM4,475m (+25.6% yoy) was in line with our and consensus estimates, supported by operating income growth of 9.7% yoy (underpinned by both fund-based income and fee-based income growth) while impaired loan allowances (-7.6% yoy) and impairments (-40% yoy) continued to decline. Credit cost for 2017 dipped to 69bps vs. 74bps in 2016. Though operating expenses grew at a rate of +5.6% yoy, the CIR of 51.8% is well within management’s expectation of <53% while JAWS remain positive at 4.1% in 2017. Despite seeing flat loan growth in 2017 (affected by corporate repayments), it has not affected fund-based income growth, of which has been robust at 8.4% yoy. CIMB’s flat NIM of 2.63% in 2017 continues to face pressure subsequent to the Bank Indonesia’s rate cuts in Aug17 and Oct 2017.

2018 Outlook - Challenging NIM and Loan Growth Outlook

Management is guiding for potential NIM compression of 5bps in 2018E against 2017’s average of 2.63% (due to margin pressure from Indonesia), a 55-60bps in net credit charge (under the adoption of MFRS 9), loan growth at 6% (in the absence of corporate repayments), cost-to-income ratio (CIR) of 50% and a 10.5% ROE (on a business-as-usual basis).

Reaffirm HOLD, PT Raised to RM7.30 (1.38x CY18 P/BV)

We reiterate our HOLD rating on CIMB, though we raise our Price Target

to RM7.30 based on a target P/BV of 1.38x on CY18 NBVPS (underlying assumptions: 2018E 9.7% ROE and 8.4% cost of equity) from RM6.65. We raise our FY18-19E net earnings by 3-25% to account for the impact of the 25bps rate hike and the one-off gains totalling RM1.1bn. Downside risks – NIM pressure. Upside risks – lower overheads, stronger loan growth.

Source: Affin Hwang Research - 1 Mar 2018