Much is factored in

As it stands, our earnings forecasts for FY17 already factor in a much improved operating environment for CIMB Niaga and an expected improvement in its credit costs. As a result, we expect the Indonesian operations to contribute to a higher 21% of group earnings in FY17 versus just 9% in FY15. We maintain our forecasts for CIMB Group and our TP of MYR4.70 (FY17 P/BV of 0.9x, ROE: 8.6%). HOLD.

Credit costs to move lower for CIMB Niaga

From our meeting with management, asset quality domestically and in Indonesia remains stable but additional provisions will be required in Thailand in 4Q16 while provision levels remain sticky in Singapore. Guidance is that CIMB Niaga’s credit costs could move towards 150bps sometime in FY17 (from 290bps in 1H16), though the year’s average is likely to be higher. Our FY17 estimate of 170bps appears reasonable at this stage and even if we were to assume a lower 150bps, the impact would be just a 2% upward revision to CIMB Group’s FY17 earnings.

No cash call envisaged

Management is confident of achieving its targeted CET1 ratio of 11% this year. MFRS9 implementation in 2018 will likely negatively impact its capital ratios but guidance is that its 12% target for 2018 should not be too adversely affected and there will not be a need for a cash call.

Cost savings from JV with China Galaxy

Management targets at least a 100bps uplift to CIMB Group’s cost/income ratio upon completion of its 50:50 JV with China Galaxy Securities on the stockbroking front, given the deconsolidation of running costs of about MYR600m-700m per annum. Nevertheless, the net impact to the group’s earnings would likely be immaterial, in our view, given that the stockbroking business is not a significant contributor to group profit (MYR20m-30m loss in FY15). Positively though, there should also be a marginal increase to the group’s CET1 ratio from this JV.

Source: Maybank Research - 28 Apr 2021