We are maintaining BUY on CIMB Group Holdings Bhd (CIMB),with an unchanged fair value of RM8.00/share, based on an ROE of 14.9% FY12Fand fair P/BV of 2.1x.

CIMB posted net earnings of RM1,133mil for 4QFY11 (+11.9%QoQ), bringing the total to RM4,031mil for FY11. This included a one-offrevaluation gain of RM250m from the deconsolidation of CIMB Aviva. Strippingthis off, net earnings would be 9.6% below our estimate and 5.0% belowconsensus estimates. 

What is positive in the 4QFY11 results is the strong CASA performance,with total CASA deposits for the group up 6.3% QoQ. This raised CASAcontribution to 34.5% in 4QFY11 from 33.0% in 3QFY11. This indicates an improvingdeposit-taking franchise for CIMB, with the bulk of the increase coming fromMalaysia and Singapore. 

In addition, if we were to strip off the one-off gain of RM250milrelated to CIMB Aviva, the total pre-tax profit for both its corporateinvestment banking (CIB) and treasury and investment banking division fell byonly 13.9% QoQ and 27.9%, respectively. We believe that the performance isresilient, considering that 4QFY11 was reflective of soft capital marketactivities, while the previous 4QFY10 included several lumpy fee income frommega deals. 

Gross impaired loans were lowered by 4.0% QoQ in 4QFY11,which is an improvement from the ptick of 1.2% in 3QFY11. Gross impaired loansratio was reduced to 5.1% from 5.5% in 3QFY11. Loan loss cover was raised to 81.1% from 80.0%. Credit costs rose to61bps from 23bps in 3QFY11 (2QFY11: 20bps). Part of the increase was attributedto changes in the basis for estimates of its probability of default. Thus, wewould interpret this as more of changes in data estimates rather than any majordeterioration in collateral values. 4QFY12's earnings were no doubt boosted by the one-off gain of RM250mil,but core underlying operations were not as weak as feared. 

At the current share price, the market is pricing a lower ROEof 14%, with either two scenarios:- (1) credit costs will shoot up to 81bps forFY12F (we have modelled in 54bps), with an implied loan loss provision ofRM1,555mil (our estimate is RM1,044mil; FY11's was RM487mil). The company hasunveiled a new ROE target of 16.4% for FY12F; or (2) non-interest income will fall substantially. We believe this isunlikely, given indications of continuing healthy pipeline. We maintain ourstance that CIMB has already priced in an almost worst-case scenario, in terms ofcredit costs. Rerating catalysts are:- (a) higher-thanexpected ROE guidance forFY12F; (b) better-thanexpected credit costs and NPLs.