CIMB Group’s earnings in the next 12 months may be more modest than we previously forecast due to the weaker operating outlook in Indonesia, which also includes rising funding pressure, while the Malaysian operations will remain the key driver, underpinned by sound consumer and commercial banking operations, with NIM expected to be steady. Therefore we cut our 2018-20 net earnings estimates, revise our PT down to RM6.10 (1.14x CY19E P/BV) from RM7.50 (1.39x CY19E P/BV) and downgrade CIMB to HOLD from BUY.

Indonesian Operations May Remain Lacklustre Over a Longer Period

Key macro issues faced in Indonesia, i.e., the weakening of the Rupiah (13% decline year-to-date), rising interest rates, high oil prices and a twin deficit, have altogether dampened sentiment in the country, which may persist over a longer period (over the next 6 to 9 months) than expected. CIMB Niaga, which accounts for 17% of CIMB Group’s 1H18 pre-tax profit, may see weaker growth and profit contribution (~15% to Group’s PBT) arising from slower loan growth at CIMB Niaga (2Q18: 3% yoy) and inevitable margin pressure. Positively, management’s credit cost guidance for CIMB Niaga remains on track to trend around 150bps in 4Q18 (1H18: 167bps).

Earnings Revisions of -1.2%/-4.4%/-6.2% for 2018E/19E/20E

Our 2018E/19E/20E earnings revisions of -1.2%/-4.4%/-6.2% are premised on a larger degree of NIM compression as we factor in another 7bp decline in 2018 to 2.48% (previous assumption 2.55%), and for 2019-20E, another 10bps decline to 2.45%. These were largely due to the rise in funding pressure from Indonesia, more competitive pricing and the rise in shortterm interbank borrowings (within the Group). Meanwhile, our expectation of loan growth has remained unchanged at 4.1-4.7% in 2018-20E vs. management’s target of 6% for 2018 (at Group), with the Malaysian market expected to grow 8% yoy while Indonesia’s loan growth could be challenging in the corporate and SME space. The Group’s net credit cost may gravitate towards circa 50bps in 2018-20E, in our view.

Downgrade to HOLD; Price Target Cut to RM6.10 (1.27x CY19 P/BV)

We downgrade CIMB from a BUY rating to HOLD as we slash our Price Target to RM6.10 (at 1.14x CY19E P/BV target) from RM7.50 (at 1.39x P/BV target on CY19E BVPS) after our earnings forecast revisions. Downside risks: deterioration in asset quality and further NIM pressure. Upside risks: macro improvement and reduced competition.

Source: Affin Hwang Research - 24 Oct 2018