Post-meeting with management yesterday, we maintain our MARKET PERFORM call on CIMB but cut our TP to RM6.02 following the downward revision in earnings. At the meeting, discussion mainly revolved around asset quality and outlook for each OpCos. All in, we still find that its T18 plan is an uphill task to realize given current weak economic conditions.

Updates on Malaysian operations (contributed 72% to FY14 PBT). We understand CIMB had conducted a series of stress tests on its banking books for O&G, palm oil and steel-related corporate customers and the outcome suggest no significant issues on asset quality. Furthermore, unsecured personal loan which originated from the lower income group is not a concern since it makes up less than 1% of total loan book. Nevertheless, focus will remain on growing the SME segment as highlighted in its T18 plans.

Updates on Indonesian operations (contributed 19% to FY14 PBT). Nothing new for its Indonesian operation. Management reiterated that CIMB Niaga is poised to grapple with another round of high bad loan provisioning in 2Q15; its gross non-performing loans (NPL) ratio is expected to rise and come in between 4-4.5% this year (1Q15: 4%). Besides, FY15 net interest margin (NIM) is expected to taper below 5% (1Q15: 5.2%) as a result of the shift in its loan portfolio mix to higher quality assets. Overall, CIMB Niaga’s financial performance should stay weak in 2Q15.

Updates on Singaporean operations (contributed 7% to FY14 PBT). Management did not elaborate much on its operations in Singapore. We only gathered that its loans growth tapered in the last 12 months (FY14: +24% YoY vs. FY13: +92% YoY) reason being its trade finance business is short-term in nature with a quick churn rate.

Updates on Thai operations (contributed 5% to FY14 PBT). Management shared that NPL issues in Thailand are fairly well contained and of late, they have been stricter with their lending guidelines. The uptick in CIMB Thai’s 1Q15 default rate (+60bpts YoY to 3.7%) was mainly due to bad loans arising from the energy and auto financing segments.

Forecasts & risks. Following the paltry set of results posted by both CIMB Niaga and Thai, we cut our FY15 earnings forecast (on a Group level) by 3% after imputing higher loan loss provision. That said, our FY16 estimates are kept, as we render existing assumptions to be conservative. Key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans & deposits growth, (iii) higher-than-expected rise in credit charge, (iv) further slowdown in capital market activities, (v) unfavourable regulatory changes, and (vi) adverse currency fluctuations.

Valuation & recommendation. Post-earning revision, we lower our GGM-TP to RM6.02 from RM6.21 based on 1.24x FY15 P/B (previously 1.28x); we utilised: (i) COE of 8.8% (unchanged), (ii) FY15 ROE of 10.1% (previously 10.5%), and (iii) terminal growth of 3% (unchanged). All in, we maintain our MARKET PERFORM rating on CIMB as we believe that its T18 plan is an uphill task to realize given current weak economic conditions. Plus, as we know it the banking industry is facing structural and cyclical headwinds.

Source: Kenanga