CIMB’s  MYR3.55bn  private  placement  will  address  issues  relating  to capital as the exercise will boost its CET-1 ratio to a respectable  9.7%.The  proactive  capital-raising  exercise  also  means  less  uncertainty ahead  when  Bank  Negara  finalises  its  requirements  on  the countercyclical buffer.  We lower our FV to MYR8.90  (from MYR9.50)  to factor in the new shares, but retain our BUY call.

• Raising MYR3.55bn common equity tier 1 (CET-1) capital via private placement.  On  13  Jan,  CIMB  announced  a  capital-raising  exercise involving  the  issuance  of  500m  new  shares,  or  6.1%  of  its  enlarged share base,  via  a  private  placement.  The  new  shares,  to  be  issued  at MYR7.10/share, will raise proceeds totalling MYR3.55bn.
• Lifting CET-1 ratio to 9.7%.  On a proforma basis, the proceeds raised will lift the  group’s  CET-1 ratio to around 9.7% from 8.2% as at 30 Sept 2013. A 9.7%  CET-1 ratio  is within the generally cited 9-10% range that most  banks  see  as  a  comfortable  capital  level  and  is  also  above  the 9.5%  ratio  that  Bank  Negara  (BNM)  may  require  banks  to  hold  after incorporating the various required buffers.
• Possibly  prompted  by  adverse  market  movements.  CIMB  said  that the  sharp  depreciation  of  the  IDR  has  been  a  setback  to  its  capital accumulation plans. The adverse direction that bond yields had  taken  in 2013  may  have  also  prompted  the  fund-raising  exercise.  Based  on  its 9M13  results,  we  estimate  that  adverse  forex  and  interest  rate movements shaved off around MYR1.1bn in CET-1 capital. According to management, the capital raising exercise is not for M&A purposes.
• Issues  ahead  include  sustainable  ROE  level  and  dividend reinvestment scheme (DRS).  With the issue of capital addressed, we think  investors  will  now  look  for  further  guidance  on  the  group’s sustainable ROE level going forward and whether the DRS will continue.
• Forecasts.  We lower our FY14 EPS forecast by 6%,  while our FY14F ROE has been diluted by 70bps to 15%.
• Investment case. We lower our FV to MYR8.90 (from MYR9.50), based on  an  unchanged target 2014 P/E of 14x.  We see value  at the current price and maintain our BUY call. CIMB is one of the key beneficiaries of the Economic Transformation Programme (ETP).

CET-1 capital gets a boost
Raising  MYR3.55bn  CET-1  capital  via  private  placement.  CIMB  announced  a capital raising exercise  on 13 Jan involving the issuance of  500m new shares (6.1% of enlarged share base) via a private placement. The new shares will be issued at MYR7.10/share, bringing the total proceeds from the exercise to MYR3.55bn. Lifting  CET-1  ratio  to  9.7%.  In  its  4Q12  results  briefing, CIMB  set  out  its  plan  to raise its CET-1 ratio to >9.5% by end-2015. The placement means that the bank has achieved  its  target  almost  two  years  ahead  of  schedule  as,  on  a  proforma  basis, group CET-1 ratio will be lifted to around 9.7% from 8.2% as at 30 Sept 2013. A CET-1 ratio of 9.7% is within the 9-10% range generally cited by banks to be a comfortable capital level and is also above the 9.5% CET-1 ratio that BNM may require banks to hold after taking into account the: i) minimum common equity capital ratio of 4.5%, ii) capital conservation buffer of 2.5%, and iii) countercyclical buffer of up to 2.5%.

Capital-raising  possibly  prompted  by  adverse  market  movements.  CIMB  said that  the sharp depreciation of the IDR has been a setback to its capital accumulati on plans.  The  adverse  direction  that  bond  yields  have  seen  in  2013  may  have  also prompted  the  fund-raising  exercise.  Based  on  its  9M13  results,  adverse  forex  and interest  rate  movements  have  shaved  off  MYR1.5bn  in  shareholders’  equity  –exchange fluctuation reserve  of MYR693m and available for  sale  (AFS)  revaluation reserve  of  MYR817m.  By  our  estimates,  this  translates  to  MYR1.1bn  in  CET-1 capital, after taking into account the required regulatory adjustment of a 55% haircut for AFS reserves. The capital-raising exercise was not, according to management, for M&A purposes.

Issues ahead include sustainable ROE level and DRS.  With the issue of capital addressed, two things  that we think investors will now seek further guidance   on from management  are:  i)  the  sustainable  ROE  level  going  forward,  and  ii)  whether  the DRS  will  continue.  Management  has  a  16%  ROE  target  for  2013.  The  private placement  will  result  in  an  enlarged  shareholders’  equity  base  (+12%  to  group  30 Sept  2013  shareholders’  equity)  and,  barring  a  strong  pickup  in  2014  net  profits, dilute ROE. For 2014, we think a 15% ROE target may be possible. This  will  also be similar to Maybank’s 2013 ROE target, post the MYR3.66bn capital raising exercise it did  in 2012.  Also,  now  that  CIMB  has  shored  up  its capital,  it  remains  to  be seen 
whether management will opt to keep in place the DRS. The latter appears to be well received, achieving a take-up rate of 80.2% for the recent 2Q13 interim dividend. The flipside  is  that  the  DRS is slightly  dilutive,  with  an  estimated  1%  impact  on  FY14F EPS and 40bps to FY14F ROE.

Risks

The risks include: i) slower-than-expected loan growth, ii) weaker-than-expected  net interest  margins  (NIMs),  iii)  weaker-than-expected  capital  market  activities,  iv)  a deterioration in asset quality, and v) adverse foreign exchange movements, which will negatively impact the translation of results of its foreign subsidiaries.

Forecasts
We have incorporated the placement shares in our model. We have not factored in any  earnings  enhancements  from  the  placement  proceeds,  but  the  enlarged share and  shareholders’  equity  base  have  resulted  in  a  6%  dilution  to  our  FY14F  EPS forecast  and  a  revised  FY14F  ROE  projection  of  1 5%  (previously  15.7%).  We continue to assume for now that CIMB will keep its DRS in place.

Valuations and recommendation

Following  the  EPS  revision  above,  we  lower  our  FV  to  MYR8.90  (from  MYR9.50). Our target 2014 P/E multiple of 14x (a 10% discount to the 10-year average to factor in  higher earnings risk due to  its  Indonesian operations) is unchanged.  Admittedly, the  stock  continues  to  face  near-term  headwinds  from  Indonesia’s  challenging environment. However, we  think this has largely been priced in. We are still  positive on the outlook for the domestic front,  thanks to the emergence  of a new investment cycle. In our view,  CIMB’s  strong domestic corporate presence means  that the bank will  be  one  of  the  major  beneficiaries  of  the  rollout  of  ETP  projects.  Malaysia  still contributes  the  bulk  of  group  PBT  (9M13:  62%).  Apart  from  that,  other  re-rating catalysts  we  see  include  more  positive  news  flow  on  Indonesia’s  macroeconomic front,  a stronger pickup in capital market  activities  and cost  restructuring  initiatives bearing fruit. Maintain BUY.  Following the share price weakness YTD, we see  value 
at the current price levels and think that any further selldown is a good opportunity to accumulate the stock.

Source: RHB