Post meeting with management yesterday, we maintain our RM6.90 TP with a MARKET PERFORM call. Management painted for a growing and stable environment with CIMB on track to achieve its FY17 targets. There are no surprises so far with no new catalyst or game changer in the horizon.

On track. We left CIMB’s management briefing fully satisfied that there will be no surprises for the Group in 2017 with FY17 targets looking achievable. To recap, management had earlier this year set its FY17 targets; (i) ROE at 9.5%, (ii) loans growth at 7%, (iii) NIMs to compress by 5bps, and (iv) credit costs of between 60bps to 65bps, and (v) dividend pay-out ratio of 40% to 60%. While FY17 targets appear to be on track, we believe 2Q17 results will likely be soft.

A better NIM. A plus point coming from the briefing is that management guided for lesser compression from NIM than previously guided, for FY17. Management expects better NIM driven by Niaga (recall that Niaga’s 6M17 results saw NIMs improving by 52bps to 5.9% on the back of strong CASA growth and efficient liability management as cost of funds fell faster than average lending yields). As management doesn’t see much traction in Niaga’s loan growth, upward pressure on funding costs is unlikely. NIM compression will mostly come from Malaysia with a guided Malaysia NIM compression of around 5bps.

Moderating loans. Management maintains its overall loan target of 7% YoY for FY17. 2Q17 was quiet but management expects pick-up in 2H17 as the economic conditions improve. For Malaysia, Wholesale and Investment banking loans were soft with lethargic corporate banking. Management expects a pick-up in 2H as the pipeline is growing. On a good note, mortgage lending is growing despite the repricing in mortgage loans. Growth rate of mortgage loan has been recording at 7-8% and management expects a potential growth at ~100bps above the industry. Better turnaround time and improving take-up and approval rates are also supporting the mortgage growth. The group’s corporate loans are mostly lumpy in item with the pipeline strong and with more corporate loans coming from the private sector than previously registered. Niaga’s 2Q17 loans picked up QoQ from mortgages and SMEs and management expects mid-single digit growth but expects Niaga’s overall growth to be lower than target as corporate loans grew slower than expected coupled with shrinking auto loans.

Forecasts & risks. No change to our FY17 forecasts as we render existing assumptions to be conservative at present.

Valuation & recommendation. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth and downside pressure on NIMs still prevail. Our valuations are based on its 5-year average P/BV with a 0.2SD below its 5-year mean of 1.35x P/B where we utilised: (i) COE of 7.6%, (ii) FY18 ROE of 8.9%, and (iii) terminal growth of 2.5%. The 0.2SD below the mean is on concerns of MFRS9 going forward and downside risks on NIM due to another cycle of deposit taking activities: (i) as NSFR approaches, and (ii) on higher-than-expected credit demand. As total returns are still <9%, we maintain MARKET PERFORM.

Key risks to our forecasts 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 - 3 Aug 2017