Post meeting with management yesterday, we maintain our target price of RM6.90 with an OUTPERFORM call. We see no surprises over the horizon and the Group is on track to meet its FY17 targets.

At management briefing yesterday, it was highlighted that CIMB is on track to achieve its FY17 targets with no major issues arising. To recap, earlier this year the Group had set out its FY17 targets; (i) ROE at 9.5%, (ii) Loans growth at 7%, (iii) Credit costs of between 60bps to 65bps, and (iv) Cost to Income ratio of ~53%.

Loans target challenging. While still maintaining its 7% YoY loan target, management views that the target as challenging, but is optimistic that the seasonal pick-up in 4Q will help toward achieving its 7% target, driven by domestic demand especially from corporate loans. Thailand, Indonesia and Singapore loans growth are expected to be soft and not likely to pick up as management is not focusing on these domestic markets. Weakness from Thailand is due to the soft SME space with Indonesia weakness due to limp auto bookings.

NIMs likely to be stable. Overall management expects a flat NIMs for FY17 (vs initial target of a 5-10bps compression). Malaysia and Thailand’s NIMs are looking stable with Singapore picking up but dragged down by compression from Indonesia. The flat NIMs are attributed to soft deposit-taking as credit demand is not robust. The soft deposit-taking saw benign competition for deposits; thus, there is no added pressure on cost of funds. Strong CASA growth from transactional banking is also giving CIMB an added advantage in mitigating funding costs pressure. A further plus point in stable NIMs with the Group’s NSFR at ~100% with added advantage of Thailand and Indonesia NSFR above 100%.

On track for provisioning. Management reiterated its credit cost target of 60-65bps for FY17. Provisioning especially from domestic, Singapore and Indonesia operations are expected to be within guidance with the exception of slight uptick from Thailand coming from commodity related SMEs and likely to continue into 4Q. Management is looking at ~200bps in credit cost in Thailand for FY17 but does not expect this to be repeated for FY18. No change in provisioning in Indonesia which is expected to be within guidance as credit demand softens. Management also reiterated that its expects a reduction by 50bps in CET1 for FY18 as regulatory reserves will be utilised to offset the increase in provisions with credit costs in FY18 unlikely to veer much off from the FY17 expected credit costs of 60-65bps.

Forecasts & risks. No change to our FY17 forecasts as we render existing assumptions to be conservative and within guidance at present. Our FY17 assumptions are; (i) ROE at 8.6%, (ii) Loans growth of ~6.5% (iii) Credit cost of around 65bps (unchanged), (iv) CIR at < 53%, and (v) NIM compression of 1bps.

Valuation & recommendation. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth still prevails. The recent sharp fall in its sharp price has made the stock looking attractive with its decent dividend yield of 3.2% supporting attractive returns of >10% to our TP of RM6.90. 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 (The 0.2SD below mean is on concerns of MFRS9 going forward). On a further positive tone, note its NSFR of >100% is giving credence to its high NIMs of 2.8% and average lending yields of 5.2% (2QFY17). OUTPERFORM.

Source: Kenanga Research - 20 Oct 2017