Selling minority stake in Bank of Yingkou to optimise capital. On 30 Dec 2016, CIMB Group Hldgs (CIMB) announced a sale of its 18.21% stake in Bank of Yingkou to Shanghai Guozhijie Investment Development. CIMB is selling it for RM972m (or RMB1.507bn), which implies 1x BV. Recall that CIMB purchased this stake back in 2009 for RM178m. The purchase consideration is slated for an all-cash transaction, with expected completion in 2017 (subject to regulatory approvals). Despite the sale, CIMB expects strategic collaborations to continue with Bank of Yingkou as part of its endeavors within China.

Capital relief expected from divestment. Bank of Yingkou makes up the bulk of CIMB’s associate contribution, which stands at c.3% of CIMB’s pre-tax profit. Hence, we expect the impact to earnings to be minimal to CIMB. Positively, CET1 ratio is estimated to be enhanced by 15-20 basis points from the current level of 10.9% (fully loaded at 10.7%). This divestment puts CIMB closer towards achieving its T18 CET1 target. CIMB’s FY16 CET1 target has been raised to 11%. We understand that the T18 CET1 target would likely be raised to 12%.

Expect more divestments to come. We are not surprised by this sale and had previously highlighted this possibility, which is in line with CIMB’s T18 strategy. Thus far, among the initiatives CIMB has undertaken under this objective include sale of its stake in Sun Life in Indonesia and an ongoing negotiation to establish a 50:50 joint venture with China Galaxy Securities in its stockbroking business. We would not discount a divestment of its 9% stake in Tune Protect.

Maintain HOLD, RM4.80 TP. Our TP assumes 10% ROE, 5% growth and 11% cost of equity. We believe 2017 will remain a challenging year for CIMB, making the stock difficult to rerate beyond 1x BV for now. Across its regional operations, asset quality should be keenly tracked. Although indicators in Malaysia have held up better than expected, we expect provisions to remain elevated in Indonesia and to increase in Thailand for 4Q16.

Source: Alliance Research - 3 Jan 2017