After our recent meeting with management, our key takeaways are: i) a marginally lower loan growth expectation of 5-6% at the Group level in 2019; ii) elevated overhead, with a CIR potentially exceeding 2018’s 52.6%; iii) a 5-10bps NIM compression (vs. 2018 at 2.5%); iv) 2019 net credit cost of 40-50bps is on track; and v) ROE within guidance of 9.0- 9.5% (taking into account disposal gains and NPL sale gain at Niaga). In our view, there is downside risk to earnings heading into 2020 as any moderation in operating income will be insufficient to cushion the rise in overhead (Forward 23-related). There is also potential for downward revision in consensus 2020-21E earnings, due to elevated overhead and a lack of catalysts on topline growth. Maintain HOLD and TP of RM5.65.

Group Loan Growth Target Expected at 5-6% for 2019

CIMB’s management is expecting a marginally lower loan growth target of 5-6% yoy for 2019 vis-à-vis a target of 6% which was set since early 2019. Compared to our 2019E, we maintain our loan-growth projection of 4.1% yoy as we foresee more downside risk due to weak business and consumer sentiment, in particular in Malaysia. CIMB’s Malaysia corporate loanbook is seeing some sluggish growth due to some chunky repayments in 3Q19, though its SME loanbook is still growing at c.20% yoy while consumer banking is tracking the same growth trajectory as last year. For 1H19, CIMB saw YTD loan growth of 2.8%, underpinned primarily by its consumer banking (+3.5% ytd) while wholesale banking was up 2.3% YTD. We believe that management will accelerate the growth at CIMB Niaga (particularly consumer and in infrastructure loans) as well as in Thailand in order to make up for the potentially slower prospects in Malaysia.

2019’s CIR May Potentially be Over 53%, Due to Forward 23 Initiatives

Management is targeting a cost-to-income ratio (CIR) of 45% by 2023 under its Forward 23 initiative (to future-proof the group). Nonetheless, the group has to bear the immediate burden of higher opex which is largely related to scaling-up its digital infrastructure (leveraging on technology and data), and repositioning and growing regionally (upskilling its workforce and through ventures/partnerships). Per management’s previous guidance, this may cause its opex to balloon up to 6-8% p.a.. Hence, the group’s CIR may miss its 2019 target, which is to stay flat vs. 2018’s CIR of 52.6%.This is also made worse by weaker-than-expected operating income growth.

Flexible working plan offered to staff – potentially easing future CIR

According to an online news article which was previously reported on 6 August 2019 by The Edge Markets, the CIMB group has launched a human resource initiative, ie, FlexMyCareer, which offers new job opportunities beyond banking and other entrepreneurial opportunities with CIMB partners. It also allows its staff to opt for early retirement. The new initiative falls under its ‘Future of Work Centre’ which aims at equipping the group's workforce with essential skills and opportunities to prepare employees for the digital economy. In our view, this initiative may benefit the CIMB group in the longer run as it would help to downsize its workforce while simultaneously rebuild staff capabilities with a more competitive edge. We believe that the group’s long-term CIR will gradually ease as the group beefs up revenues and income.

Management Maintain 5-10bps NIM Compression Target for 2019

Management is maintaining its expectation of a 5-10bps compression in NIM in 2019 (vis-à-vis 2018’s 2.5%), largely underpinned by softer netinterest-income (NII) generation due to: i) the impact of the 25bps rate cut in Malaysia; and ii) the four rate cuts in Indonesia (from July, August, September and October), totalling a 100bps reduction in the BI rate on a YTD basis. Accordingly, in 3Q19, CIMB is expected to see a sequential improvement in NIM due to effects of the downward repricing of deposit rates in Malaysia. The domestic deposit competition has not been intense of late, however, it is expected to pick up around year-end and may spillover from consumer to wholesale.Over at CIMB Niaga, management is looking at beefing up its CASA growth as a means to mitigate its NIM compression.

A Potential Re-rating of the Stock Price, If CET 1 Rises Above 13%

Management indicated that should the CET-1 ratio rise above 13% (12.9% as at end-June 2019), the Group’s dividend reinvestment scheme may be reviewed, potentially with a higher cash portion for shareholders. In our view, a reduction in the portion of dividend reinvestment shares will result in a less dilutive impact on future EPS, and hence, could potentially cause a re-rating on its languishing share price as ROE improves with greater cash dividend payouts.

Maintain HOLD, TP Unchanged at RM5.65 (0.96x 2020E P/BV)

We Maintain Our HOLD Rating With a 12-month Target Price of RM5.65, based on a 0.96x P/BV target on our 2020E BVPS (based on 2020E 8.8% ROE and 9.0% cost of equity). At this juncture, we note that though the upside potential for the stock has continued to widen, re-rating catalysts appear to be lacking and we also foresee a potential downward revision in consensus 2020-21E earnings, due to elevated overhead levels. On a more positive note, asset quality for the group is expected to improve, with some prospects of a credit recovery at CIMB Niaga in 2020. As for now, management maintains its 40-50bps guidance in net credit cost for 2019, with some prospects of credit recovery expected in 3Q19.

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 a CIR of 54-55%. At this juncture, we have yet to price in the impact of another potential rate cut in Malaysia.

Downside risks: further rate cuts, deterioration in asset quality, higher overheads. Upside risks: macro improvement and stronger loans growth.

Source: Affin Hwang Research - 29 Oct 2019