Post-meeting with management yesterday, we keep CIMB’s TP at RM6.31 but our rating recommendation is put under review (previously MARKET PERFORM). At the meeting, discussion revolved mainly around the outlook of its domestic and Indonesian operations. Besides, we also gathered that some of its KPI targets would be difficult to achieve. That said, these were largely considered and factored in our model.

Updates on Malaysian operations (contributed 80% to 1Q15 PBT). Management shared that pressure on net interest margin (NIM) was eased by benign competition for deposits in 2Q15. This is because banks have become more rational with their borrowing habits. Between Dec-14 to Feb-15, fixed deposit rate in the retail space was as high as 4.2% vs. currently ~3.6%-3.8%. On the other hand, loans growth is set to taper as household lending weakens, stemming from negative sentiment surrounding the country.

Updates on Indonesian operations (contributed 4% to 1Q15 PBT). Outlook remains challenging. CIMB Niaga is poised to post another weak quarter given high provision for bad loans; gross nonperforming loans (NPL) ratio is expected to come in at 4-4.5% this year (1Q15: 4%). Furthermore, FY15 NIM is guided to fall below 5% (1Q15: 5.2%) due to a shift in its loan portfolio mix to higher-quality assets. All in, Niaga’s 2Q15 results should remain lethargic.

Group-wide cost saving initiatives on track with earlier guidance. We understand that the RM443m cost incurred for the mutual separation scheme (MSS) exercise will be fully taken into account in 2Q15 and 3Q15. This initiative along with its earlier move to cut regional IB headcounts will produce total cost savings of ~RM500m/annum. That said, CIMB is still looking at a broad-based cost management drive to further rationalise cost by ~RM100m/annum.

ROE and loans growth targets harder to achieve. On the backdrop of a weaker macroeconomic environment, management shared that its ROE and loans growth targets of 11% and +10% YoY this year would be a tall order to achieve. However, we are not overly perturbed by this development as our FY15 ROE forecast is 10% (1ppts below management guidance). That said, our loans growth assumption (+10% YoY) faces some downside risk as per guided. Nevertheless, 1Q15 loans growth was still sturdy at +13% YoY.

Forecasts & risks. No change to our forecasts 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. Although we are still of the view that its T18 strategy is a difficult feat to pull off, value has started to emerge given the recent pullback in its share price. To note, as of end June-15, CIMB’s foreign shareholding is at an all-time low of 30.0% and it is trading at 1.1x P/B (previous low in 2009 was 31.6% and priced at 1.2x P/B). Hence, we retain our GGM-TP at RM6.31. This is based on 1.22x FY16 P/B (COE of 8.8%, FY16 ROE of 10.0%, and TG of 3%). As for rating recommendation, we are in the midst of a review, pending Niaga’s results end of the month (previously, we have a MARKET PERFORM call).

Source: Kenanga Research - 22 Jul 2015