INVESTMENT HIGHLIGHTS

• The Group will be divesting part of its stake in CIMBPrincipal Asset Management and CIMB-Principal Islamic Asset Management to its partner, Principal Financial Group.

• Consideration to be received is RM470.3m, while the Group will recognize a gain of RM950m and improvement in CET1 ratio by +18bps.

• Not too surprising given recent trend.

• No negative impact to earnings given its smaller contribution.

• Maintaining FY18 core net profit forecast by tweaking the non-normalised earnings.

• Better loans growth and NIM to be driver for this year. Maintain BUY with adjusted TP of RM7.17 (from RM7.10), based on 1.3x PBV on FY18 BVPS.

Announcement of a divestment. The Group announced yesterday that it is divesting its 20% stake in CIMB-Principal Asset Management Bhd (CPAM) and 10% stake in CIMB-Principal Islamic Asset Management Sdn Bhd (CPIAM) to companies related to its partner in CPAM and CPIAM, Principal Financial Group. This will result in a realignment of ownership in CPAM and CPIAM whereby Principal Financial Group will increase its ownership in both entity to 60% respectively while the Group will retain a 40% stake. As such, CPAM and CPIAM will cease to be a subsidiary of the Group. The transaction is expected to be completed by 2QFY18.

The Group does not expect material impact. For the divestment of its stakes, the Group will receive a total consideration of RM470.3m. The Group does not expect the divestment have any material effect on its consolidated gearing and net assets for FY18. The divestment will also not have any effect on the Group's share capital and substantial holdings of its shareholders.

One-off impact to earnings and will impact book value slightly. The Group are expecting to recognize a gain of RM950m for FY18. We estimate that this will increase our FY18 earnings projection by +15.1%. However, since this is a one-off gain, there will be no change to our core net profit forecast. We also estimate that the divestment will add another 5 sen to our BVPS forecast which would bring the BVPS FY18 to RM5.51.

Increase in CET1 ratio will help with MFRS 9. The Group are also expecting an improvement of +18bps to its CET1 ratio, which we estimate would be circa 12% after the divestment. While we believe that the Group is sufficiently buffered for the impact of MFRS 9, we opine that this divestment will have provide additional cushion. Previously, management guided that there will be a slight drop in CET1 on Day One of implementation of approx. - 50bps but will subsequently recover, partly via utilising the regulatory reserve.

Focusing on core business. We opine that the latest divestment is part of the Group’s strategy of focusing on its core banking business, given the recent trend such as the partnership with China Galaxy. We believe that the Group’s earnings going forward will not be significantly impacted by the divestment. This is due to the fact that Group Assset Management and Investment contributes circa 2.0% to 3.0% of Group’s PBT.

FORECAST

We are tweaking upwards our FY18 net profit forecast by +15.1% to take into account the potential gains but we are maintaining our FY18 core net profit because of the one-off nature of the transaction.

VALUATION AND RECOMMENDATION

Overall, we do not foresee any negative impact for this divestment. We believe that it is part of the Group’s overall strategy to focus on its core banking business as highlighted by previous other transactions. We opine that robust loans growth and stable margins will be the Group’s growth drivers for this year. As such, we maintain our BUY call. We are adjusting our TP to RM7.17 (from RM7.10) to take into account slightly higher BVPS due to this transaction. Our TP is based on pegging its FY18 BVPS to 1.3x PBV.

Source: MIDF Research - 12 Jan 2018