Period 4Q13/FY13

Actual vs. ExpectationsThe reported FY13 net profit of RM4,540.4m accounted for 97.5% and 95.6% to our estimate of RM4,626.7m and market expectation of RM4,751.1m, respectively. We deem this set of results as broadly within expectations.

Nonetheless, this is a respectable set of results given that 2013 operating environment was far more challenging than expected, especially in Indonesia and Thailand. For instance, the 15% decline of Rupiah against Ringgit over the year had also reduced Indonesian Income by an average of 8.1%.

As such, FY13 ROE was only recorded at 15.5%, which is slightly below the management target of 16% but it is still ahead of our estimate of 14.7%

Dividends Declared a final dividend of 11 sen in the form of cash or an optional Dividend Reinvestment Scheme (DRS), making the full-year dividend payment to register at 23.8 sen (vs. 23.4 sen in FY12) and implying a payout ratio of 40.5%, which is inline with the management’s guidance of 40.0%.

Key Result Highlights

FY13 vs. FY12:CIMB Group’s total income was 4.9% higher YoY with net interest income growing by 7.5%.

The Group’s gross loans expanded 12.6% YoY, which was pretty close to our estimate of 12.1% but below management’s guidance of 15.0%. This was due mainly to forex translation. We understand that the Group’s total loans growth should be registered at 16.5% after adjusting for currency fluctuation. Thus far, we understand that the loans growth was driven by lending for working capital (+22.1%). Loans to household/individual grew 15.7% and were driven by personal loan (+16.5%) and loans for purchase of securities (+23.9%). Other consumer loans such as credit card (+13.2%), residential mortgages (+9.3%) and auto financing (+5.5%) grew at a slower pace.

Again, the slower net interest income growth rate as opposed to loans growth was due mainly to further NIM compression of 22bps, especially at CIMB Niaga Level (due to the sharp rise in Rupiah deposit cost).

On the customer deposits front, it grew by 6.4% YoY and was mainly driven by expansion in corporate and treasury deposits. Loan-to-deposit, ratio (LDR) was registered at 89.2% vs. 84.2% in FY12. Low cost deposits (or CASA), in the meantime, were relatively stable at ~35% of total customer deposit, which cushioned further erosions in NIM.

Non-interest income was 4.4% higher, excluding the RM515m gains from the sale of 51% interest in CIMB Aviva in 1Q13. The lacklustre performance in this segmental income is comprehensible as we saw higher volatility in the capital market for the year and the significant outflow of foreign fund also caused wild fluctuation in ringgit movement and bond yield, which collectively impacted on the performance of investment banking and treasury activities. Besides, 2012 was a high base year, being a bumper year for Malaysian IPOs as well.

The Islamic banking income, however, declined 5.7% despite its financing activity growing by 5.1%, accounting for 16.1% of total Group’s loans. This was owing to lower Islamic capital markets activities.

Due to the merger cost of RBS, including expenses for MSS, operating expenses increased 11.1% YoY, resulting in higher cost-to-income ratio (CIR) at 59.8% (vs.56.4% in FY12). However, should we include the one-off gains from CIMB Aviva sales or exclude these one-off merger costs, the CIR should have been recorded at between 56%-57% based on our estimate, which is actually in line with performance in FY12.

The Group’s total impaired loan allowances of RM660.6m in FY13 was >100% higher than the RM329.1m in FY12. Consequently, credit charge ratio spiked to 30bps in FY13 as opposed to 17bps in FY12 and was higher than our estimate of 20bps. Apart from higher provisions at CIMB Niaga and CIMB Thai as well as lower recoveries, the higher credit cost also reflected the more prudent/tighter provisioning policy. This is not surprising as the Group’s gross impaired loans ratio and loan loss coverage were at 3.2% and 84.8%, respectively, as opposed to the industry average of 1.3% and 107.6%, respectively.

As at end-2013, CIMB Group’s Common Tier 1 (CET 1) capital ratio stood at 8.1%, just above its internal target of 8.0% due to the impact of Rupiah depreciation. The weaker CET 1 was resolved after the Group undertook a private placement of new equity from RM3.55b on 13 January 2014 to lift its profoma CET 1 to 9.5%. The Group’s Tier 1 capital and Total Capital ratios stood at 10.2% and 13.5% (vs. FY13 Target of >11%) as at end-Dec13 vis-a-vis 10.5% and 16.2% in FY12. CIMB Group’s leverage stood at 19.1x, meeting its FY13 Target of <20x.

4Q13 vs. 3Q13:

QoQ, the net profit of the Group declined 2.2% despite its ability to record a strong QoQ growth of 9.1% for its Total Income. The lower profitability was owing to a +54.0% QoQ increase in loan impairment.

Net interest income was only 0.7% higher but Islamic and non-interest incomes grew at stronger rates of 18.5% and 21.6% QoQ. We understand that the stronger non-interest income was due mainly to the improved capital markets, especially in the debt market segment.

Overheads rose 3.8% QoQ, which is lower than total income, hence CIR improved from 59.1% in 3Q13 to 56.3% in 4Q13.

Outlook It was a tough year for the Group’s Indonesia operations. However, it is believed that the situation has shown some signs of stabilization and probably will improve further after its presidential election. Nonetheless, loan growth is expected to be slow in the short-term and industry NPLs are expected to rise in 2014. So far, the prognosis for 2014 is weakest for Thailand as the situation is compounded by domestic political turmoil. As Malaysia and Singapore are expected to show higher GDP growth on the back of stronger exports and domestic consumption, despite seeing inflationary pressures, which will impact consumer demand, they are expected to be the main income drivers for FY14.

With the completion of the APAC platform, markets permitting, IB will do better as a whole. Nonetheless, the management reckons that the regional treasury markets to be as challenging as they were in 2013.

All told, 2014 will still be a year full of challenges for CIMB Group. Coupled with the expansion of its capital base post private placement, the Group has set a ROE range of 13.5-14.0% for 2014. We believe this target is achievable as we have estimated a FY14 ROE at 14.3%.

Change to Forecasts

Post results, we have revised down our FY14 net profit estimate by 6.8% from RM5,127.1m to RM4,776.7m (+5.2% YoY). We also introduce our FY15 net profit forecast of RM5,136.2m (+7.5% YoY). These estimates are more conservative than consensus estimates of RM4,810.1m and RM5,507.8m, respectively. Our DPS estimates are pegged at 24.0 sen and 24.5 sen for FY14 and FY15, representing ~40% in payout ratio and translating into yields of 3.4% and 3.5% respectively. Our estimates are based on the following major assumptions:

Loans growth: 12.7%-11.0% for FY14-FY15 vs. FY14 target of 14%.

NIM to continue to be under pressure with further contractions of 6-7bps for FY14 & FY15.

Cost-to-income ratio to improve to 56.2% for both FY14 & FY15.

Loan loss charge: 30bps for FY14 & FY15 vs. management guidance of 35-40bps.

ROE estimated at 14.3%-13.5% for FY14-FY15 vs. management target of 13.5-14.0%.

Rating Maintain MARKET PERFORM despite offering >13% in Total Return due to operating environment uncertainties.

Valuation Post earnings revisions and private placement, coupled with rolling our valuation base year to FY15, we fine-tuned our Target Price (TP) to RM8.00 from RM8.10 previously. This TP represents 1.8x to our FY15 EPS estimate or ~13.5x FY15 PER (which is inline with its 3-year PER average).

Risks to Our Call Tighter lending rules and further margin squeeze in general.

Tougher operating environment especially in investment banking and treasury market.

Deterioration in Indonesian Rupiah and NPLs as well as further rise in interest rate.

Source: Kenanga