Post-meeting with management yesterday, we reduce CIMB’s TP to RM4.23 and downgrade our recommendation. At the meeting, discussion revolved mainly around the outlook of its asset quality. While the current numbers are not cause for alarm, the trend looks like it’s getting weaker.

Asset quality. All in all, management shared their view that asset quality is not a concern at the present moment. Although there are signs that asset quality is weakening, it is not critical as yet.

Thailand. Management does not see any significant quality drop for commercial loans. As for retail, it believes problematic loans are increasing but the ratio will drop once new loans take over by the end of the year.

Indonesia. Quality of loans is still weakening and not getting better. Nevertheless, management expects that the problematic loans will peak by end of 2015 and is hopeful that quality will improve in 2016. Loan weaknesses are mostly confined to commodity-related ones while corporate and retail weaknesses are not significant.

Malaysia. Corporate and SME’s loan are not an issue but the retail side is showing signs of weaknesses although there is no notable trend. Spending and demand patterns are slowing down which will significantly increase credit costs on the retail side. The Group have conducted several stress tests and are satisfied with current conditions and do not see any concerns in absolute provisions. Management maintained that there is no sharp increase in loan provisions.

 Earnings guidance. Management gave a couple of guidance for FY15. NIM compression will be around 20 bpts for 2015. Credit costs will be between 50 to 76 bpts. However, no guidance for FY16 is given.

Lowering earnings forecasts. We tweaked our forecast slightly to reflect ongoing concerns of asset quality. Hence we revised upwards our credit costs to 70 bpts for FY15 (previously 59) and 60 bpts (previously 44bpts) for FY16. To reflect the 20 bpts compression in interest margin, our NIM is now pegged at 2.54% (from 2.6%) for FY15. Other assumptions are maintained as we believe they are conservative enough. Thus, our earnings are revised downwards by 7% and 17% for FY15 and FY16 respectively.

Valuation & recommendation. With the cut in earnings, we arrive at a new GGM-TP of RM4.23 (previously RM5.63). This is based on 1.0x FY16 P/B (previously 1.22 FY16 P/B); we utilised: (i) COE of 8.8% (unchanged), (ii) FY16 ROE of 7.9% (previously FY16 ROE of 9.4%), and (iii) terminal growth of 3% (unchanged). The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Hence, our lower rating of Underperform (vs. Market Perform previously).

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. 

Source: Kenanga Research - 22 Oct 2015