What’s New

• In-line 4Q/FY16 earnings; provisions stayed high as expected, driven by Thai and Indo operations

• Loan growth accelerated in 4Q16; ROE hit 8.4% in FY16, missing initial target of 10%

• 2017 should be better; 2H17 performance to improve compared to 1H17

• Earnings raised for higher topline growth and better cost control, but negated by higher credit cost; Maintain HOLD, TP raised to RM5.00

Half-way to the finish line

A better year but 1H17 will still see some sluggishness, HOLD. Issues pertaining to credit costs may still spill over to 1H17 before diminishing in 2H17. Management seems a little more optimistic going into FY17 but managing credit costs will be crucial. ROE targets remain uninspiring for FY17. CIMB Niaga should gradually turn around in 2H17. Positively, its Malaysian operations have stayed stable. Its ASEAN expansion strategy is ongoing with the Philippines to be added to its list. CIMB is at its half-way mark in its T18 strategic initiatives but its ultimate 15% ROE target is unlikely to be achieved.

In-line 4Q/FY16 earnings, with provisions staying high particularly for its Thailand and Indonesia operations; NPL ratio rose to 3.3% for these markets. NIM slipped, while loan growth accelerated in 4Q16 from wholesale banking in Malaysia and Indonesia, bringing its full-year loan growth to 9% y-o-y. Excluding the one-off gain booked in 3Q16 from the sale of its stake in Sun Life insurance, non-interest income was sluggish from relatively weak capital markets. Expenses on a business-as- usual (BAU) basis were well contained. ROE came in at 8.3% in FY16, below its 10% target. CET1 rose to 11.3%. A second interim DPS of 12 sen was declared, bringing its full-year DPS to 20 sen, equivalent to a 50% payout.

A little bit more to reach finish line. The item that stood out in its FY17 targets is its still uninspiring ROE of 9.5%. Although better than FY16, FY17 will be a year of two halves – a weak 1H, followed by a better 2H, hinging mainly on credit cost which is still relatively high at 60-65bps (FY16: 82bps). Loan growth is targeted at 7% while NIM guidance still points to a 5- 10bps slippage. A sub-53% cost-to-income is targeted and CET1 is targeted at >11.5%. CIMB’s T18 ROE target of 15% will be challenging to achieve given the current scenario. Post earnings adjustment, our TP rises to RM5.00.

Valuation:

CIMB is a HOLD with a RM5.00 TP that is based on the Gordon Growth Model and implies 0.9x FY17F BV. Our TP assumes 10% ROE, 5% long-term growth and 11% cost of equity.

Key Risks to Our View:

Faster-than-expected delivery of T18 strategies and core earnings recovery. We have imputed credit costs higher than guided on account of a slower recovery. A quicker-than- expected delivery of its T18 strategies would prove our bearish view on CIMB wrong.

Source: Alliance Research - 1 Mar 2017