After reviewing CIMB’s mid-term strategy statement aka T18, we opine that it would be uphill task to achieve but we applaud its ambitious aspiration. All in, we keep our MARKET PERFORM call on the stock with an unchanged TP of RM6.27. Unveiling its T18 initiatives. Last Friday, CIMB unveiled its midterm strategy statement for the next three years called ‘Target 2018’ (T18). By then, management aspires to achieve: (i) return on equity (ROE) in excess of 15% (9M14: 11.6%), (ii) common equity tier 1 (CET1) ratio of more than 11% (9M14: 9.7%), (iii) cost-to-income ratio (CIR) of less than 50% (9M14: 57.8%), and (iv) consumer banking division to account for ~60% of overall group’s PBT (9M14: 44%). Also, there will be a group-wide reorganisation exercise with three core divisions being created: (i) regional commercial & SME banking, (ii) wholesale banking, and (iii) regional consumer banking.

Cost-savings to drive growth. Essentially, CIMB will turn to strategic cost optimisation initiatives to lift profitability. Also, business focus will now shift towards: (i) commercial & SME banking, (ii) transaction banking, and (iii) digital banking while its strong investment banking franchise will take a back seat. To kick-off, management intends to reduce the overall IB operating cost by ~30% this year. Based on our estimates, ~RM310m could be saved, raising our FY15E bottom-line by ~8%.

T18 is an uphill task. In our opinion, achieving T18 would be an uphill task for CIMB but we applaud its ambitious aspiration. After all, the banking industry is facing structural and cyclical headwinds such as: (i) tepid loans/deposits growth, (ii) net interest margin (NIM) compression, and (iii) weak capital market activities. Assuming CIMB’s total income grow by a 4-year CAGR (2014-2018) of 6%, its overheads can only expand by a maximum of 2% within the same period to bring its CIR to below 50%. Whereas, its net profit needs to accelerate by a 4-year CAGR of 17% to enable ROE to climb above 15% by 2018; note that we have considered the dilution impact of its dividend reinvestment plan based on an 80% take-up rate.

Completing its ASEAN-5 puzzle. Notably, CIMB also shared that it will not be looking for M&A opportunities except for minor ones, which could help to complete its ASEAN presence. We believe management will take a closer look at the Philippines given its interest on Bank of Commerce and Philippine Business Bank in the past. Furthermore, liberalisation of the banking industry over there – which allows 100% foreign ownership (previously 60%) – is another pull factor for CIMB.

Forecasts & risks. No change to our forecasts, pending its FY14 results in the next couple of weeks. 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. Although T18 is a positive development, there are short-term operational headwinds and execution risk for now. Recall, during our recent meeting with management, we gathered that CIMB’s 4Q14 results is likely to be lacklustre on the back of its ‘spring cleaning’ exercise. All in, we maintain our MARKET PERFORM call while TP is kept 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