INVESTMENT HIGHLIGHTS

• Met the Group’s CFO yesterday for an analyst briefing.

• Main take away from the meeting was that the Group is expected to meet its FY17 targets except loans growth.

• Loans growth was affected by situation in Thailand and Indonesia, where the Group is consolidating its loans book particularly in SME and auto loans respectively.

• No undue competition in deposits.

• More or less ready for FRS 9.

• Revise upward FY18 forecast by +13.6%.

• Optimism remains. Upgrade to BUY with unchanged TP of RM7.10, based on 1.3x PBV on FY18 BVPS.

Key take aways. We met with the Group's CFO yesterday for an update of the latest development. Below are some of the key take aways from the briefing:

• The Group is on track to meet its target except for loans growth. This is mostly contributed by the weakness in Indonesia, Thailand and Singapore.

• Healthy deal pipeline for NOII.

• NIM compression appears to be more benign than first expected. There are no undue deposit competiton presently.

• Slight drop in capital ratios due to Day One impact of FRS 9 but will subsequently recover.

On track to achieve targets except loans growth. We understand that the Group is on track to meet its FY17 and its T18 transformation targets. This include ROE of 9.5%, CI ratio of less than 53% and credit cost of 60-65bps amongst others. However, the Group could potentially miss its loans growth target of +7.0%yoy.

Not a major concern for miss in loans growth target. Despite potentially missing its loans growth targer, the Group are not overly concern. This is due to the fact there were some weaknesses in the Indonesia and Thailand. As a result, the Group had been consolidating its loans portfolio in these markets. For example, the Group had reduced its exposure in auto loans in Indonesia and SME loans in Thailand. Meanwhile, loans in Malaysia have been resilient including surprisingly mortgages.

Thailand will determine which way FY17 credit cost swings. Management is confident that credit cost will range between 60 to 65bps for FY17. This will be mainly determined by Thailand as there were a rise in 3QFY17 where it came +89bps yoy higher to 2.49% due to all of its SME segment, especially commodity related. CIMB Thai's credit cost came in at 2.31% for 9MFY17 vs. 2.14% for 9MFY16. Meanwhile, Indonesia is expected to see gradual improvement with credit cost around 200bps. There is also pocket of weakness in Singapore due to remnants from the Oil & Gas sector but it is not a significant contributor at Group level. Malaysia will be the moderator with the uptick in 2QFY17 expected to normalised in 2HFY17. Nevertheless, even if the Group's FY17 credit cost were to come in at the upper limit, it will still be an improvement from the previous year.

Update on CIMB Thai's result. The higher provisions were the main contributor to the lower earnings in Thailand for 9MFY17. Net profit fell -30.6%yoy to THB554.4m. Putting into context, operating income expanded +1.5%yoy to THB9.84b from higher NII (despite loans growth of only +1.9%yoy) and fee income. These grew +3.6%yoy and +21.0%yoy to THB7.60b and THB1.47b respectively.

NOII is expected to be better in 3QFY17. Management indicated that NOII may come in better in 3QFY17 due to the healthy deals pipeline. Furthermore, the execution rate of the deals pipeline have increased.

No undue deposit competition. The common expectation is that deposit competition might be heating up due to the requirement of Net Stable Funding Ratio (NSFR). However, the Group have already complied, and this include CIMB Thai and CIMB Niaga, with NSFR of above 100%. As such, we believe that the Group does not have to compete for deposits either in FY17 or FY18. Consequently, we expect NIM compression to be more benign that we had initially anticipated. This somewhat echo Management's observation, whereby NIM for the Group is expected to be flat on a sequential year basis.

Update on FRS 9; slight fall in CET1 ratio on Day One impact but will recover, while not much change in credit cost. Early indication by the Management is that CET1 ratio is expected to be able to reach its T18 target of 12.0%. This is taking into account the impact of FRS 9. There will be a slight drop on Day One of implementation but will subsequently recover, partly via utilising the regulatory reserve. Also, Management does not expect credit cost to be significantly different from present levels. However, we opine that there will be volatility in provisions in the first 2 to 3 years.

FORECAST

With the expectation that NIM compression is likely to be benign and Management's expectation of ROE of between 10.5% to 11.0% in FY18, we are revising upwards our FY18 forecast by +13.6%.

VALUATION AND RECOMMENDATION

We continue to be optimistic of the Group’s prospects. While there are pockets of weakness in Indonesia and Thailand, situation are improving gradually. We expect performance in Malaysia to continue to be solid and will continue to carry the Group forward. With the expectation of possible muted impact from FRS 9 and the recent retracement of its share price, we believe there is an investment case to be made. As such, we are upgarding our call to BUY (from NEUTRAL) with unchanged TP of RM7.10. Our TP is based on pegging its FY18 BVPS to 1.3x PBV.

Source: MIDF Research - 20 Oct 2017