Period  4Q14/FY14

Actual vs. Expectations  FY14 core earnings of RM3.2bn (-25% YoY) came below expectations, representing only 80%-81% of our and consensus’ full-year estimates.

 The shortfall was primarily due to a higher-thanexpected provision for bad loans.

Dividends  A final DPS of 5.0 sen (vs. 4Q13: 10.0 sen) was declared, bringing its full year DPS to 15.0 sen (vs. FY14: 23.0 sen). However, in terms of payout ratio, it was maintained at 40%. That said, the final DPS was below our and street expectations of 10.0 sen.

Key Results Highlights

FY14 vs. FY13, YoY  The poor numbers was mainly due to: (i) weak contribution from its Islamic banking arm (-8%), (ii) lower non-interest income as capital market activities were sluggish (-15%), and (iii) higher loan loss provision for its coal-related portfolio in Indonesia along with a legacy loan in Malaysia (+130%).

 Pressure on net interest margin (NIM) was well arrested at 2.74%, thanks to better price management in Indonesia, Thailand and Singapore.

 Loans and deposits grew at 13% and 7%, respectively, bringing loan-to-deposit ratio (LDR) to 94% (+5 ppts). That said, actual loans growth was above our expectation (+3ppts) but came in slightly below management guidance (-1ppts).

 Loans growth was supported by: (i) strong consumer loans take-up (+13%), especially from mortgages (+11%) and term loans (+15%) in Malaysia, along with (ii) a boost from Indonesia’s corporate loans (+26%).

 Deposit-taking activities were tepid in Malaysia (+3%) and Indonesia (+7%) but were mitigated by contribution from Thailand (+21%) and Singapore (+37%), albeit on a low base.

 Overall, current account & savings account (CASA) grew a commendable 9% and now makes up 35% of total deposit base.

 Cost-to-income ratio (CIR) was relatively flat at 59%.

 Asset quality showed slight improvement as gross impaired loans ratio (GIL) declined by 6bpts. However, loan loss coverage (LLC) fell 2ppts to 83% despite credit charge ratio spiked 32bpts.

 Annualised ROE fell 5ppts to 9%, coming in below our and management expectations of 12%-14%.

 CET1, Tier 1 and total capital ratios improved 1%-2% to 10%, 12% and 15%, respectively.

4Q14 vs. 3Q14, QoQ

 Quarterly earnings dipped 78% due to: (i) higher loan loss provision as explained above (+167%) and (ii) overall opex which increased 10%.

 NIM fell 5bpts as cost of fund (COF) rises due to stiff price-based competition in the domestic market for retail deposits.

 LDR declined slightly to 94% as loans grew 6% while deposits advanced 7%.

 CIR jumped 4ppts to 62% since income base only grew 2% while opex accelerated by 10%.

 Given that credit charge ratio spiked by 91bpts while GIL decreased by 19bpts, LLC rose 9ppts to 83%.

Outlook  In Malaysia (contributed 72% to FY14 PBT), weak private consumption resultant from rising inflation coupled with the relatively high industry LDR (of over 80%) are likely to cap lending activities. Hence, we expect system loans growth to taper to 7-8% (from ~9% in 2014). Furthermore, asset quality may come under pressure as default rates climb due to higher cost of living. This along with slower recoveries from bad legacy business loans is poised to push credit charge ratio upwards. Also, NIM pressure is likely to persist given shrinking liquidity in the market.

 In Indonesia (contributed 19% to FY14 PBT), operational headwinds should persist over the short-term. In a surprise move two weeks ago, its central bank lowered the benchmark interest rate by 25bpts to 7.5%. The easing in monetary policy came after the steep fall in global oil prices, which helped to cool inflationary pressure. With this, NIM compression is likely to stay. Furthermore, the high industry LDR of over 90% will spur competition in the market, especially within the deposit taking space.

 In Singapore (contributed 7% to FY14 PBT), growth momentum may taper as the nation’s economic outlook is not as rosy as before; 2014 GDP nudged up by only 2.9% and it is not expected to pick up this year marred by deflation concerns, weak productivity, tight labour market and higher external export related risk. To note, the official 2015 GDP growth forecast by the Government is 2%-4%.

 In Thailand (contributed 5% to FY14 PBT), the economy remained on a weak recovery path given modest consumption, investment and exports growth, which consequently weighed down 2014 GDP numbers. However, it should gain traction moving forward given that, back in October, Junta leader and Prime Minister Prayuth Chan-ocha introduced fiscal stimulus package worth THB365bn to jumpstart the sluggish economy – this is targeted towards public investment, job creation and cash handouts to rice and rubber farmers.

 Management introduced its FY15 guidance: (i) ROE to come in at 11% (Kenanga: 10%), (ii) Total loans growth of 10% (Kenanga: +10%), (iii) Credit charge ratio of 40-50bpts (Kenanga: 42bpts), and (iv) CIR below 55% (Kenanga: 57%).

 1Q15 should be another subpar quarter as there are still some coal-related bad loans in Indonesia, which are yet to be provided for. However, the legacy loan in Malaysia has been fully accounted in this reporting season.

 Overall NIM should come under pressure from higher COF given the pressing need to replenish its deposit book; 4Q14 LDR is at a high of 94%.

 Execution updates on its mid-term strategy, ‘Target 2018’ (T18): (i) closing down Australian operations which is targeted to complete by April 2015 (~100 personnel will be affected), (ii) ~50 personnel were let go across APAC markets in February, and (iii) broad based cost management drive is in place to further rationalise cost.

Change to Forecasts  Post updating the full set of FY14 financial results into our model, we made some housekeeping adjustments. Our FY15E net profit was left relatively untouched (at RM4,127m vs. RM4,134m previously) despite registering a poor set of numbers; this is because FY14 was marred by high allowance for bad loans as part of its ‘spring cleaning’ exercise. Hence, FY15 earnings projection should return to a more normalise growth trajectory – we have taken into account another round of high loan loss provisioning with regards to its coal-related portfolio in Indonesia for 1Q15. Also, we introduced our FY16E, where we expect earnings to grow by 5% to RM4,321m.

 For the next two years, FY15E-FY16E ROE is seen to come in at 10%.

Rating Maintain MARKET PERFORM  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. Hence, we reckon that there are short-term operational headwinds and execution risk for now.

Valuation  Following the update in full-year numbers, we nudged down our GGM-TP to RM6.21 from RM6.27 based on 1.28x FY15 P/B (previously 1.35x); we utilised: (i) COE of 8.8% (previously 9.3%), (ii) FY15 ROE of 10.5% (previously 11.5%), and (iii) terminal growth of 3% (unchanged).

 The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Recall that the stock was traded at average P/B of 2.0x for the past two years when it generated ROE of more than 15%. As a result, we employed a lower P/B valuation yardstick.

Risks to Our Call

 Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

 Slower-than-expected loans and deposits growth.

 Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

 Further slowdown in capital market activities.

 Unfavourable regulatory changes.

 Adverse currency fluctuations. 

Source: Kenanga