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Ending a challenging year. On a normalised basis, 9M16 loan growth of 2.2% and annualised ROE of 8.5%, point to clear challenges in achieving its FY16 targets. Loan growth however could pick up in 4Q16 on better business momentum in the corporate segment. Across its regional operations, asset quality should still 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. Overall oil & gas exposure remained contained. Overall provision levels should be lower compared to a year ago albeit at the higher end of the guided 60-70bps credit cost. Positively, expense trends are well on track to meet a cost-to-income ratio of <53% while its capital ratio, CET1, is expected to hit 11% for FY16. NIM slippage still guided at 10bps largely from the Malaysian book.

FY17 should be a better year. Provisions should taper off in FY17 gradually and again, this would likely be its key earnings driver. Top-line growth may remain unimpressive as NIM could still slip by another 5-10bps although the root of compression would be different vs FY16 as the slippage would largely arise from Indonesia as it continues to recalibrate its portfolio. Loan growth could spring a surprise. The pick-up in CIMB Niaga would be gradual. CIMB Niaga’s current CEO has been in office for 18 months. His key mandate is to put CIMB Niaga’s asset quality in order as well as cost initiatives. While commodity prices have improved, it is unlikely that recoveries will be a feature. If at all, it will be a positive surprise. CIMB Thai should see improvements but mainly from a very weak base in FY16. That said, overall ROE may still remain below 10% in FY17, which would weigh on valuations.

Watch for impact of divestments in FY17. CIMB is still in the midst of exploring a 50:50 joint venture with China Galaxy Securities in its stockbroking business (which includes institutional and retail brokerage, equity research as well as associated securities businesses). In the event an agreement is reached, management expects cost-to-income to improve by 100bps. This should put CIMB’s intention to work towards its lower targeted cost-to-income ratio. The negotiations will take place for three months from midOctober. Separately, at end-December 2016, CIMB announced the sale of its 18.21% stake in Bank of Yingkou to Shanghai Guozhijie Investment Development. The purchase consideration is slated for an all-cash transaction, with expected completion in 2017. CET1 ratio is estimated to be enhanced by 15-20bps from current levels of 10.9% (fully loaded at 10.7%). With this divestment, CIMB is closing the gap towards achieving its 11% CET1 target for T18. There could well be further divestments of its non-core business to enhance costs as well as capital.

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 re-rate beyond 1x BV for now. FY17 may see better earnings but it is again driven by lower provisions. The lacklustre revenue growth which could at best be offset by cost initiatives might still keep ROE below 10% and would continue to weigh on valuations.

Source: Alliance Research - 17 Jan 2017