FY16 results are expected to be within expectations. At an update yesterday, management maintained that CIMB’s FY16 results will be as guided; (i) ROE around 9%, (ii) Loans growth at between 6-7%, (iii) NIMs compression of 5-10bps, and (iv) Credit costs of between 60bps to 70bps. Asset quality is seen stable with no significant deterioration with asset quality issues likely to be off in both Indonesia and Thailand in 2017. While top line growth is still challenging going forward, management is confident of at least reducing its Cost-to- Income Ratio (CIR) to cap below 50% by 2018. TP of RM5.27 and OUTPERFORM call are maintained.

Asset Quality stable. Management is quite satisfied with the Group’s asset quality with no significant uptick see in 2016. Loan loss provisioning for CIMB Niaga in 2016 likely to be lower YoY but will still be toppish. Recall that Niaga’s credit costs were at 300bps for FY15. Management expects a much lower credit cost in 2017 of around 150 to 200bps (vs. 9M16 of 256 bps). Deterioration in CIMB’s Thai’s asset quality looks like to have peaked in 2016 and likely to stabilize although management maintains a cautious stance going forward as there still lingering issues from commodity-related SME’s. There is no significant change in the quality of Malaysian assets. Corporate and SME assets quality are relatively stable although there is a slight deterioration in asset quality from the retail side, management does not see it as trending; thus, overall Malaysian asset quality gave no cause for concern. Management believes that issues concerning asset quality in Thailand and Indonesia are likely to pass in 2017 but remain cautious on asset quality in Malaysia on concerns in the O&G and retail segment.

T-18 CIR achievable. Management reiterates that it is on track to achieve its CIR T18 target of ~ 50%. This is because, even thought the business environment expected to be slower, there is still room to cut costs. For instance, management pointed out that further operational cutbacks can be executed via the personnel and IT segments (Malaysia & Indonesia) with further reduction in its retail franchise (Thailand).

NIM likely continue to see pressure. Going into FY17, management added that NIM is likely to remain compressed by another 5-10bps as it was for FY16. Compared to FY15, the overall Group NIM compression in FY16 was lower, as the compression was cushioned by softer compression from Indonesia despite sizeable compression from Malaysia. For 2017, management expects lesser compression from Malaysia but not so from Indonesia. Management does not see liquidity as an issue and we believe that slower credit demand in 2017 will offset the intensive deposit taking activities that were seen previously; hence, NIM compression is likely to be alleviated.

Forecasts & risks. No change to our FY17 forecasts as we render existing assumptions to be conservative at present. 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. We are still cautious on its asset quality and credit demand going forward, although value has started to emerge given the recent pullback in share prices. It is trading at a 5-year low of 0.9x P/B. For now, we keep our GGM-TP of RM5.27 on a 1.0x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17E ROE of 8.7%, and (iii) terminal growth of 2.5%. With a 12% potential upside, we maintain our OUTPERFORM rating.

Source: Kenanga Research - 17 Jan 2017