At CIMB Group’s pre-close period briefing, management’s tone remained cautious on the outlook for the rest of the year. Meanwhile, we note that as CIMB embarks on its Forward 23 programme, there could potentially be pressure on its 2019 cost-to-income ratio (CIR) target of 53% and 2019 ROE target of 9.0-9.5% amidst a moderating outlook on income generation (for the overall banking sector). The group’s 2019 guidance remains unchanged - loans growth at 6% yoy, NIM lower by 5-10bps yoy, credit cost at 40-50bps and CET-1 ratio at >12%. We see a modest outlook for CIMB Group in 2019 (core net profit growth of 6.9% yoy; core EPS +3.6% yoy), on the back of improved provisioning and credit costs. Maintain HOLD, PT at RM5.65 (0.96x CY19E P/BV).

2Q19 Results Expected to See Some Adjustments, But Non-recurring

We expect CIMB’s upcoming 2Q19 results (29 Aug) to see some nonrecurring adjustments as follows: i) MFRS 9 ‘expected-credit-loss’ (ECL) writebacks; ii) a corresponding adjustment to the effective interest rate, hence impacting negatively the net interest income line (related to the MFRS 9 model enhancement); and iii) a one-off disposal gain of approximately RM200m related to the proposed business transfer of the Malaysian stockbroking business to Jupiter Securities. Overall, the impact of these adjustments will have a net positive impact on the group

Increase in Overheads Likely Around 6-8% Yoy in 2019

Management highlighted again the additional operating expenses for 2019, which will be underpinned by a 3-4% yoy business-as-usual (BAU) growth and another 3-4% yoy related to the Forward 23 expenditure which includes investment in IT infrastructure, transforming customer relationship management and upskilling of its workforce.

CIMB’s Loan Growth Target of 6% in 2019; We Are Less Optimistic

CIMB’s management maintains its 6% loan growth target in 2019, though we are a little less optimistic due to expectations of a moderating economic outlook. Positively, a potential ramp-up of CIMB Niaga’s loanbook could help the group achieve this target through participation in syndicated loans. As at 1Q19, CIMB saw a year-to-date loan growth of 1.3%, underpinned primarily by its consumer banking (+1.6% qoq) and commercial banking (+1.4% qoq) operations.

Other Takeaways – Subdued Capital Markets; NIM 5-10bps Compression

Given the relatively subdued capital market outlook for 2H19 (though the deal pipeline remains healthy), we believe that fee income growth will remain modest. CIMB has also indicated that fee income growth in 2Q19 has also been slow and it has not seen a robust pick-up in demand for structured products either.

Management has also indicated that it maintains its expectation of a 5- 10bps compression in the NIM in 2019 (vis-à-vis 2018’s 2.5%), largely underpinned by softer net-interest-income (NII) generation at CIMB Niaga as a result of potential funding pressure in 2H19. CIMB Niaga’s potential participation in lower-yielding syndication loans in Indonesia and any potential benchmark rate cuts could further lower the group’s overall NIM.

Management indicated that should the CET-1 ratio rise above 13% (12.8% as at Mar19), the Group’s dividend reinvestment scheme may be reviewed, potentially with a higher cash portion for shareholders.

Maintain HOLD, PT Unchanged at RM5.65 (0.96x CY20E P/BV)

We Maintain Our HOLD Rating With a 12-month Price Target of RM5.65, based on a 0.96x P/BV target on CY20E BVPS (based on 2020E 8.8% ROE and 9.0% cost of equity). We have tweaked some of our assumptions such as our cost-to-income ratio and credit costs, but the overall earnings impact is not material. For now, our 2019-21E key assumptions include loan growth at 4.1-4.3% yoy, NIM at 2.45%, credit cost at 38-39bps and CIR of 54-55%. Downside risks: deterioration in asset quality, higher overheads, weaker investment results. Upside risks: macro improvement and stronger loans growth.

Source: Affin Hwang Research - 29 Jul 2019