Following a meeting with management, we raised our TP to RM6.80 with MARKET PERFORM call maintained. We see no significant surprises over the horizon with the Group on track to meet its FY17 targets.

At management meeting yesterday, it was highlighted that its FY17 target is achievable 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%. However, management highlighted moderate loans ahead with NIM compression likely looming.

FY17E loans target achievable. CIMB guided for overall loans growth of ~7% (as targeted previously) coming from the resilient domestic market coupled with improvement in Thailand and a stable Niaga. Although the expected corporate demand in 4Q17 did not materialise, resilient demand from mortgages will support the ~7% loans target with Indonesia loans driven by demand from corporates and retail. Overall for the Group, management expects corporate and business loans to pick up, propelling FY18 loans to mid-to-high single digits but likely offset by slowdown from retail. Boost in corporate loans are expected to be supported by Niaga’s participation into Indonesia’s infrastructure projects with mortgages and credit cards expansion driving Niaga’s growth in 2018.

Downside pressure on NIMs expected for FY18. While flattish NIMs are expected for 2017, management guided for compression in FY18. The OPR hike is unlikely to impact much in the domestic market due to the lag in deposits repricing (expected within two quarters). Niaga’s NIMs is expected to come down for FY18 but Thailand is expected to improve as deposit taking activities are over with Liquidity Coverage Ratio (LCR) requirements achieved. Overall, management expects cost of funding to be stable in Malaysia/Indonesia due to NSFR and LCR achieving stipulated requirements. NIM compression is expected to come from its mortgage book as the interest spread is low.

Asset quality satisfactory. Overall asset quality is stable with no concerns from Malaysia and Indonesia. For domestic operations, management is satisfied with asset quality on the mortgages and SME’s/Corporate’s front with its mortgage portfolio being more residential driven, allaying risk concerns. Indonesia credit cost is expected to be ~200bps as provisioning is lower than expected. Management also reiterated that its expectations of a reduction of 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. No change to our FY17E earnings as we render existing assumptions to be conservative and within guidance but slight change for FY18E earnings to RM4.59b (+0.2%). Our FY17E/FY18E assumptions are; (i) ROE at 9.1%/8.9% (both unchanged), (ii) Loans at 6.7%/7% (from 6.7%), (iii) Credit charge at 65bps/72bps (both unchanged), and (iv) flattish NIMs for both FY17E/FY18E (unchanged)

Valuation & recommendation. Our TP is now at RM6.80 (from RM6.75) based on a FY18E PB/PE of 1.17x/13.3x (previously GGM of RM6.75 based on its 5-year average P/BV 1.09x (with a 0.5SD below mean). The higher PB is to reflect the headwinds on asset quality receding with post MFRS9 credit charge likely lower than expected. Despite the demanding valuations, we maintain our MARKET PERFORM call as returns are within definition.

Source: Kenanga Research - 02 Feb 2018