After a meeting with management yesterday, we see no change in our view of tight earnings going forward. Asset quality is seen stabilizing with no visible sign of deterioration. With loans growth still challenging, earnings enhancement can only be derived from new business ventures with the added value of costs rationalization. We maintained our MARKET PERFORM call but raised our TP as the expected JV with China Galaxy will see a significant reduction in costs for FY17.

No significant deterioration in asset quality. Overall asset quality is seen stabilizing if not improving. Credit costs are relatively stable despite a slight uptick in 2H16 but insignificant according to management. On a YoY basis, provisions are flat at this stage. Management does not see any significant stress in the retail, SMEs and corporate segments. Provisions in Malaysia continues to hold up and with no significant deterioration. No significant stress in asset quality from the SMEs and retail side but management indicated there are potential downside risks from the retail side with the still challenging economic environment. No concerns on loans exposed to the O&G sector as most loans involved the big players with no indication of stress yet. Indonesian asset quality is seen improving albeit gradually. However, there are still concerns on asset quality in Thailand. The SME segment is still giving concerns on asset quality but its auto loans book are stabilizing. Although provisions were 39% down QoQ, management guides for further provisions for CIMB Thai by year end. Overall on a Group basis, management maintains its guidance for a 70bps credit costs for FY16.

Earnings still under pressure. The recent Base Rate (BR) revision due to the cut in OPR is expected to compress NIMs by 3bps for its Malaysian operations for FY16. As for improvement in loans growth, there were no significant upticks from the recent OPR cut. However, with approval rate improving, its loan pipeline is healthy and management is confident of slightly better loans growth for FY17. Indonesian loan growth is still subdued and no change in management’s view of growth in the mid-single digit. As for liquidity, management is satisfied with current levels at the Group level and indicated that the deposit intake cycle is off due to the subdued loans growth. However, there is a renewed risk of the deposit intake cycle coming on stream by year-end as banks will want to enhance their market share. Management maintains its overall NIMs compression for the Group of 5-10bps.

JV with China Galaxy is expected to rationalise costs. CIMB announced recently its intentions to explore a strategic partnership in the stockbroking business where China Galaxy will have opportunities to access the ASEAN market. While the structure is expected to be out in within three months, the Group expects commencement of the JV in 1H17, which will have a significant impact in its opex. With the JV, the Group’s stockbroking business is expected to see costs down by 100bps or slightly more than RM300m as per guided by management.

Source: Kenanga Research - 20 Oct 2016