News

Last Friday, CIMB announced that it will be offering mutual separation scheme (MSS) to its Malaysian and Indonesian employees.

This is in attempt to further bring down its operating cost structure as personnel expenses make up a huge chunk of its costs. (FY14: 56%).

Comments

We were not entirely surprised by the move as CIMB aims to be a leaner entity. This comes after a slew of headcount cuts within its investment banking business across the region.

As a recap, CIMB hopes to achieve: (i) return on equity (ROE) in excess of 15% (FY14: 9%), (ii) common equity tier 1 (CET1) ratio of more than 11% (FY14: 11%), and (iii) cost-to-income ratio (CIR) of less than 50% (FY14: 59%) by 2018.

With this exercise, we still reckon that T18 is not an easy task for CIMB to accomplish.

Structural and cyclical headwinds clouding the overall banking industry are hindrances to its aspiration – (i) tepid loans/deposits growth, (ii) net interest margin (NIM) compression, and (iii) weak capital market activities.

Based on our calculations, CIMB’s net profit needs to accelerate by a staggering 4-year CAGR (2014-2018) of 26% in order to see its ROE climb above 15%. In our opinion, this is a difficult feat to pull off.

Outlook

CIMB Niaga, its 98%-owned Indonesia subsidiary, will continue to drag the Group’s overall financial performance (contributed 19% to FY14 PBT) as it is likely 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%). Furthermore, CIMB Niaga’s FY15 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.

Forecast

No changes were made to our forecasts. The Group is poised to release its 1Q15 results on 20 May.

Rating

Maintain MARKET PERFORM

Valuation

Our GGM-TP of RM6.02 is unchanged. This is based on 1.24x FY15 P/B; we utilised: (i) COE of 8.8%, (ii) FY15 ROE of 10.1%, and (iii) terminal growth of 3%.

The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Recall that CIMB was traded at average P/B of 2.0x for the past two years when it generated ROE of more than 15%.

Risks to Our Call

Steeper margin squeeze.

Slower-than-expected loans and deposits growth.

Worse-than-expected deterioration in asset quality.

Further slowdown in capital market activities.

Adverse currency fluctuations.

Source: Kenanga Research - 18 May 2015