CIMB’s 12M17 results are in line, accounting for 104%/99% of our/consensus full-year forecasts. We raised our TP to RM7.40 as we see risk of elevated credit costs receding. However, MARKET PERFORM view maintained as valuations could be stretched due to the sharp share price appreciation.

In line. 12M17 CNP of RM4.48b is in line with our/market forecasts, accounting for 104%/99% of full-year estimates. A final DPS of 13.0 sen was declared bringing to the full-year DPS to 26.0 sen (in line).

Lower impairments. 12M17 CNP of RM4.48 surged ahead at +37%, boosted by lower impairments (-9%) and higher top-line of +10%. While Islamic banking income and fee-based income surged ahead (at 25% and 14%, respectively, fund-based income accelerated moderately at +6%. Loans growth was reported at <+1% (vs. guidance/expectation/system of 7%/7%/4% but domestic loans accelerated faster than system at +6%. The moderate fund-based income was underpinned by flattish NIM at 2.6%. While GIL inched ahead by 20bps to 3.4%, credit charge fell by 2bps to 0.69% (vs. guidance/expectation at 60bps/65bps). CIR was as expected at <52% (vs. guidance/industry of <53%48%). ROE of 9.4% was above our estimate (9.1%) but within guidance (9.5%). QoQ, CNP contracted 6% on account of slower top-line (+1%) with higher impairment on assets (of RM98m). Islamic banking income surged ahead at 16% with fee and fund-based income at +4% and -3%, respectively. Loans were flat and NIM was also flat (at 2.6%). Asset quality improved with GIL falling by 7bps to 3.4% and credit cost falling by 3bps to 0.71%

Growing ahead but funding cost still challenging. On the back of a stable economy, CIMB guided for an ROE of 10.5% underpinned by stronger capital market activities across the region, stronger loans (+6%) expected to be driven by domestic (+7%) with Singapore/Thailand in the mid-single digit. Costs are expected to be contained with CIR guided for ~50% and lower credit costs of 55-60bps. The Group sees funding costs pressure ahead as NIM is expected to compress (5-10bps) due to pressure from Indonesia while Malaysia’s NIM is expected to be flat despite the recent OPR hike. Impact on CET1 (under MFRS9) will be around 70-80bps.

Higher earnings. We revised our FY18E earnings by +14% to RM5.2b on account of lower impairment allowances, higher loans and introduce our FY19E numbers. Our FY18 assumptions are; i) loans at +5.5% from ~7%, ii) credit cost at 57bps (from 72bps), iii) NIM easing by 4bps (flattish previously) and iv) ROE at 10.2% (from 9.0%).

TP hiked with call maintained. Our TP is now RM7.40 (from RM6.80) based on a blended FY18E PB/PE of 1.24x/13.0x (previously 1.2x/13.3x. Both PB/PE are based on its 5-year mean with 0.5SD below attached for the PE to reflect our cautious optimism for its loans. Maintain our call at MARKET PERFORM call as total returns are <10% due to the sharp appreciation in share price.

Downside risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 01 Mar 2018