CIMB finally inked the proposed JV with China Galaxy which is expected to materialise in a cost savings of 100bps for FY18E. We have imputed the potential cost savings into our FY18E earnings estimate earlier and expect positive impact on the JV. Our TP revised up but call is maintained.

JV finally inked. CIMB announced on Bursa yesterday that they, through their wholly-owned subsidiaries CIMB Group Sdn Bhd and China Galaxy International Financial Holdings Limited, have signed a share purchase agreement (SPA) to formalise a strategic partnership across CIMB’s stockbroking business. The Joint Venture is expected as a 50:50 partnership in CIMB Securities International Pte Ltd (CSI) (the holding company of CIMB’s ex-Malaysia stockbroking business comprising institutional and retail brokerage, equities research and associated securities businesses across Indonesia, Singapore, Thailand, Hong Kong, South Korea, India, United Kingdom and the United States of America. We understand that beside the capital injected, the joint venture is poised to further capitalise on China-outbound M&As, China-ASEAN cross-border investments and infrastructure funding. The JV is expected to be fully completed by end of 2017.

No change in our FY18E earnings estimates. Recall that this SPA is a culmination of its announcement earlier in October 2016 where it announced its intentions to explore a strategic partnership in the stockbroking business where China Galaxy will have opportunities to access the ASEAN market. Then management guided that with the JV, there will be a cost savings of around RM300m or 100bps. Under the SPA, CIMB will receive a purchase consideration of SGD167.0m or RM515.0m (based on an exchange rate of 1SGD/RM3.084) from China Galaxy for 50% of its stake in CSI which is arrived at based on a multiple of 1.3 times of CSI’s consolidated net asset value of SGD256.9m as at 31 December 2015. Assuming the carrying value is as recorded at 31 December 2015, we estimate a one-off gain for CIMB of SGD38.5m or RM118.8m (based on an exchange rate of 1SGD/RM3.084) which will see our FY17E earnings up by 2%. The cost savings of nearly 100bps has been imputed into our earlier forecast for FY18E.

TP revised. No change in our FY17E/FY18E estimates as we are unable to ascertain the carrying value of CSI/cost savings has been inputed earlier. We however raised our TP to RM6.90 based on a FY18E 1.26x PB (a 0.2SD below its 5-year mean of 1.35x PB. Previously 0.5SD below), to take into account of the positive impact on the JV on its forward earnings. The 0.2SD below mean is on still concerns of MFRS9 going forward and downside risks on NIM due to another cycle of deposit taking activities as: (i) NSFR approaches, and (ii) higher-than-expected credit demand. As total returns are still <6% we maintain MARKET PERFROM.

Source: Kenanga Research - 7 Jun 2017