We  are  retaining  our  Buy  call  on  CIMB,  with  an  unchanged  FV  of MYR8.50.  Management maintained its  outlook  for the group  in a recent meeting  and  is  still  positive  on  Niaga’s  prospects.  Asset  quality appears  to  be  holding  up  while  DCM  and  treasury  activities  were healthy in 1Q. Near-term focus would be on Niaga’s results tomorrow, which could help reinforce management’s positive outlook.

• Still  positive  on  Indonesia.  Management  retained  its  positive  outlook on CIMB Niaga  (Niaga).  It expects the corporate segment to lift Niaga’s loan  growth  to  the  low-mid  teens  this  year  vs  2013’s  8%,  while  the guided  net  interest  margin  (NIM)  compression  of  20-30bps  for  2014 would  be  significantly  smaller  than  the  57bps  NIM  decline  in  2013. Funding cost remains the main source of NIM pressure, but in mitigation, management  has  seen  time  deposit  rates  ease  by  about  100bps compared  with last year’s  peak. Asset quality remains stable,  and  there was no change to the 80-100bps credit cost guidance.
• Asset quality stays  steady.  Generally, there were no major issues in terms  of  asset  quality,  and  management  has  not  noted  any  systemic issues. CIMB retained  its  group credit cost expectations of 30-40bps  for 2014 (2013: 30bps).
• Group NIM compression of 5-15bps seen. CIMB guided for group NIM compression of 5-15bps this year (2013: -19bps). The rather wide range mainly boils down to the extent Niaga’s NIM behaves. It expects margins for  the  retail  businesses  in  Malaysia,  Thailand  and  Singapore  to  be stable.
• DCM and treasury strong. 1Q14 thus far has seen healthy activities for the  debt  capital market  (DCM)  and  treasury  (rates  and forex)  divisions but management continues to expect IB activities to be volatile this year. Equities had a slower quarter in 1Q, but management said the  pipeline was strong and much would depend on market conditions.
• Forecasts  and  investment  case.  We  retain  our  earnings  forecasts. While  we  have  switched  our  valuation  methodology  to  the  Gordon Growth Model (GGM) from one based on P/E,  there is no change to  our MYR8.50  FV.  CIMB  is  an  excellent  proxy  to  the  ongoing  rollout  of  the Economic Transformation Programme and capital market activities.

Salient points from CIMB’s 25 April pre-results meeting with analysts: Still positive  on Indonesia.  Recall that management  had turned more positive on Indonesia earlier this year and there was no change  in  this stance.  It  expects CIMB Niaga  (Niaga)  to  post  low-mid  teens  loan  growth  this  year,  compared  with  the 8% growth in 2013. This would be led by the corporate segment, which was flat last year partly  due  to  management’s  more  cautious  stance  there,  while  the  retail  and commercial  segments  are  expected  to  post  stable  growth.  CIMB  also  guided  for further  pressure  on  net interest margin  (NIM)  of  20-30bps,  but  significantly smaller than  the  estimated  57bps  NIM  compression  in  2013.  NIM  pressure  would  mainly stem from funding cost  but in mitigation: i)  management has seen time deposit rates ease by about 100bps compared  with the peak last year;  ii)  further policy rate  hikes should not be as significant as the rise in 2013; and  iii) ongoing repricing of loans from last year’s rate hikes should be felt this year.  Meanwhile, asset quality remains stable  while  the uptick in special mention accounts in 2H2013 had not deteri orated into NPLs. There was no change to the 80-100bps credit cost guidance.

Raising domestic HP rates.  On the domestic front, CIMB has raised HP rates by 30-40bps  on  average,  in  line  with  the  industry.  Management  also  highlighted  that floating rate HP products were launched last year and the new bookings are mainly on floating rates. This would be positive for the group when interest rates start to  go up (our expectation is for a 25bps hike in the OPR late -3Q14). That said, HP is not a significant  part  of  the  group’s  loan  portfolio,  accounting  for  just  8%.  It  expects  theresidential mortgage segment to grow in line with  the  system,  or slightly lower (2013: +9%  vs  a  system  residential  mortgage  growth  of  13.5%).  As  for  the  corporate segment,  1Q14  growth  would  be  dampened  by  some  lumpy  government-related loans. However, these loans that were repaid are of lower yield and hence, its roll -off would  be  slightly  positive  for  loan  yields.  Liquidity  is  still  ample,  with  the  loan-todeposit ratio for the Malaysia operations at around 80%. CIMB has stayed discipline with  respect  to  its  pricing  on  fixed  deposits  despite  its  peers’  occasional  deposit campaigns.

Group  NIM  compression  of  5-15bps  expected.  CIMB  has  guided  for  group  NIM compression of 5-15bps this year (2013: -19bps). The rather wide range mainly boils down  to  how  Niaga’s  NIM  pan  out.  Margins  at  the  retail  business  in  Malaysia, Thailand and Singapore are expected to hold steady. We  are  assuming a  5bps NIM compression in our model for 2014. Asset  quality  still  steady.  While  CIMB  Thai  experienced  an  uptick  in  NPLs  (see below),  generally  there  were  no  major  issues  in  terms  of  asset  quality,  and management has not noted any systemic issues. CIMB retained its  group credit lost expectations of  30-40bps  for  2014  (2013: 30bps).  We are  keeping  our 30bps credit cost assumption unchanged for now.

Strong going for  DCM and treasury.  1Q14 thus far  has seen  healthy  activities  in the  debt  capital  market  and  treasury  (rates  and  forex)  divisions,  but  management continues to expect IB activities to be volatile this year.  Equities had a slower quarter in  1Q,  but  management  said  the  pipeline  was  strong  and  much  would  depend  on market conditions.

Capital.  Group CET-1 ratio may exceed the 10% target by 2016, especially if forex movements  and  revaluation  reserves  for  available-for-sale  securities  move favourably. Already, the IDR had appreciated against the MYR by 6% between 31 Mar 2014 and 31 Dec 2013, and this should help narrow the MYR2.1bn loss in the exchange fluctuation reserve  account at end-2013. Management would be reviewing the need to continue with its dividend reinvestment scheme  and dividend payout ratio then.

Update on CIMB Thai. CIMB Thai’s 1Q14 gross NPL ratio rose to 3.1% from 2.5% at end-2013,  mainly  due  to  higher  NPLs  at  the  corporate  segment.  This  resulted  in credit cost  rising to  107bps  up from 59bps in 1Q13,  but  this was  lower than  4Q13’s 443bps.  However,  as  mentioned  above,  CIMB  did  not  think  this  was  systemic.Despite the higher credit cost y-o-y, 1Q14 net profit was still up 41% y-o-y, albeit from a smaller base. This was largely driven by stronger treasury income as the group had put in place a new treasury team there last year.

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 its foreign subsidiaries’ results.

Forecasts
No changes to our earnings forecasts.
Valuations and recommendation We have switched our valuation methodology to the Gordon Growth  Model (GGM) from  one based on  P/E to be in line with  our valuation methodology for the  regional banks.  Our  GGM-based  MYR8.50  FV  assumes  a  10.3%  cost  of  equity,  14%  ROE and  6%  long-term  growth  (previous  P/E-derived  FV  was  MYR8.50,  based  on  14x CY14  EPS).  Our  FV  implies  a  1.86x  FY14F  P/BV,  at  a  discount  to  the  10-year average of 2x.

On  the  whole,  with  management  largely  keeping  its  outlook  intact,  we  are  also retaining our view on the group. CIMB offers strong leverage to the expected pickup in corporate lending as well as capital market activities, which we believe would be well  supported  by  the  ongoing  rollout  of  projects  under  the  various  economic programmes. Other potential rerating catalysts include asset quality holding steady, capital overhang removed and  cost restructuring initiatives bearing fruit. Hence, we retain our BUY recommendation on the stock.

Company Profile
CIMB is a fully integrated financial services group and the second largest domestic bank in Malaysia. The group's core markets are Malaysia, Indonesia, Singapore and Thailand.

Source: RHB