Post-meeting with management yesterday, we downgrade CIMB to MARKET PERFORM while maintaining its TP at RM6.27 given brewing operational headwinds and steep run-up in share price. Key takeaways from the meeting were: (i) management has opted to clean up its books in 4Q14, (ii) fall in oil prices is not a concern, (iii) NIM compression is likely to accelerate, (iv) 2015 is poised to be another slow year for capital markets, and (v) CIMB is looking to tighten its belt this year.

Weak showing ahead. Management reiterated that CIMB’s 4Q14 financial result is going to be lacklustre. Recall, earlier guidance suggests that there will be a higher loan loss provisioning for its coal and coal-related loan portfolio in Indonesia. With this, they have opted to clean up their books as well. As a result, the Group’s loan loss coverage (LLC) ratio is expected to return to the 80% region from 74% in 3Q14. Hence, 1Q15 numbers should improve on the back of this exercise but still look weak overall.

O&G segment not a concern. Management was more pessimistic on loans growth rather than asset quality. Sensitivity analysis suggests no significant issues on its loans book when oil prices hit USD50/barrel (O&G segment makes up 3.5% of its total loans book).

Net interest margin (NIM) compression is likely to accelerate. The spread between the Overnight Policy Rate (OPR) vs. the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) has widened (60bpts vs. 50bpts back in Oct-14). As a result, cost of funds (COF) is on the rise and there is a lag between its asset and liability re-pricing, where the latter is quicker than the former.

Another lacklustre year for capital markets. Capital markets are expected to be slow. Hence, CIMB’s investment banking unit is likely to see another lethargic year in 2015.

Tightening its belt. To help ease pressure on bottom-line, management is looking at various cost savings initiatives this year. More information on this will be unveiled in the next couple of weeks when CIMB announces its 4Q14 results (slated to be on 17 Feb).

CIMB Thai’s FY14 results review. Headline earnings of THB988m (-34% YoY) were below expectations, making up only 83% of streets’ full-year forecasts. However, if we stripped off the one-time shared gains from Thai Asset Management Corporation last year, then its net profit would have jumped 154% YoY. Other key takeaways are: (i) NIM expanded 26bpts YoY as COF was better managed, (ii) net loans/deposits rose 11%/21% YoY, respectively, and (iii) asset quality dipped as gross impaired loan ratio ticked up to 3.3% (+80bpts YoY).

Forecasts & risks. We make no change to our forecasts. The key risks are: (i) steeper margin squeeze, (ii) slower than expected loans growth, (iii) further deterioration in asset quality, (iv) worse than expected slowdown in capital market activities, (v) unfavourable regulatory changes, and (vi) adverse currency fluctuations.

Valuation & recommendation. Given the bleak outlook coupled with steep run-up in share price (+13%) since the merger between CIMBRHBCAP-MBSB was called off, we downgrade CIMB to MARKET PERFORM (from OUTPERFORM), while maintaining our TP at RM6.27. This is based on 1.35x FY15 P/B, derived from the Gordon Growth Model (COE of 9.3%, FY15 ROE of 11.5% and TG of 3%).

Source: Kenanga