CIMB set out last week its recalibrated medium-term strategic plan. We believe the details that were fleshed out would be welcomed by investors as it helps provide a clearer road map ahead for the group, but we note that the key financial objectives from the previous strategic plan were retained. We still think the ROE target is ambitious and execution, as usual, will be key. Nearterm uncertainties and challenges surrounding asset quality have not changed and hence, pending further updates from the quarterly analysts’ briefing, we retain our MARKET PERFORM call and TP of RM3.45.

CIMB held a briefing last Friday to share the recalibration of their strategy plan, Forward23 (F23). Called Forward23+ (F23+), this recalibrated plan retains the key financial targets from F23, i.e. (i) CIR of 45%; (ii) CET-1 ratio of 13%; and (iii) ROE of 12-13%, but extends the time frame to 2024 due to the pandemic. The path to a 12-13% ROE is underpinned as below.

Asset light driven growth (Fig 4-6). CIMB recognises that each of its key markets will require a different focus as well as strategy, and seems contented to stay selective in these markets vs. being a universal bank. For Indonesia (ID), CIMB thinks issues in corporate banking (COBA) can be addressed and scaled up easily. For commercial banking (COMBA), the ID market is tough and Niaga may need to scale back in this area. ID consumer should also benefit now that the auto portfolio has been cleaned up.

CIMB stressed that the aim is to be less reliant on businesses that are capital intensive and instead, focus on a more RWA-light model. Such segments include wealth management, treasury & markets and non- interest income. For wealth management, CIMB admitted that it would be tough to compete against the Singapore (SG) banks and hence, the focus is on clients in Malaysia (MY) and ID by offering these clients access to the global market.

Lowering loan losses (Fig 7). Management highlighted that asset quality in MY has been solid, but ID and Thailand (TH) have been key drags. This would partly be addressed by the reshaping of portfolios and focus, as above. Also, assuming the current downturn is followed by the start of a new economic cycle, there could be tailwinds from the cyclical nature of the credit cycle.

Cost management (Fig 8). As mentioned previously, CIMB targets to reduce cost by RM500m or 5% for FY20 by controlling personnel cost and tighter discipline for investments and marketing. This is followed by another cost reduction of RM300m-RM500m in FY21, with focus on personnel costs and improving productivity. Also, CIMB highlighted that its digital investments were loss making and a JV partner will help share some of these losses. With a 2-3% CAGR in opex, this suggests that opex would now be backloaded, in contrast to earlier plans to front load opex, especially on digital investments. That said, amidst the current environment, the shift may be necessary.

Capital management. As at end-2019, goodwill and intangible assets stood at RM7.9b and RM1.8b, respectively, which led to a drag of c. 200bps on ROE. Hence, goodwill/intangible write-offs form part of CIMB’s capital management plans. We note that goodwill mainly relates to its banking operations in MY (RM3.7b), ID (RM2.6b) and TH (RM1.2b), and we are uncertain if the entire amount can be written off. Also, management was confident that a capital call will not be required to support growth ahead given its asset-light strategy and focus on NoII. At this moment, while there are no major divestments planned, divesting specific businesses that are not generating enough returns is a possibility.

No change to our forecasts. Maintain MARKET PERFORM and RM3.45 TP, based on a GGM-derived FY21E PBV of 0.6x. We await further updates from the usual quarterly pre-results meeting. Our 2020E ROE of 3% is in the mid range of CIMB’s 2-4% guidance, while our 140bps is at the top end of the 120-140bps guided range. This leads us to wonder if a 2% ROE level incorporates some goodwill write-offs – negative for earnings and likely, dividends, but no impact to capital as goodwill is already being deducted for capital purposes.

Source: Kenanga Research - 19 Oct 2020