We are downgrading our call on the stock to NEUTRAL from Buy, with a revised FV of MYR7.75 (from MYR8.40). We believe a lack of excitement in the corporate lending space as well as capital market activities could dampen  topline  growth.  This  may  see  CIMB’s  share  price  trading sideways in the near term. That said, the group is now better capitalizedand is still a major beneficiary when capital markets pick up again.

• Business lending and capital market activities still subdued.  From our recent round of meetings with banks, a consistent message was that business lending has been subdued while capital markets remain quiet, albeit  with  some  improvement  from  1Q14.  Like  most  banks,  CIMB’s 1Q14 results were muted due to softer capital market conditions, and the above suggests that growing income could continue to be a challenge in the upcoming 2Q14 results.
• Expect NIM pressure to pick up ahead. As at end-March 2014, the two largest  banks,  Maybank  (MAY  MK,  BUY,  FV:  MYR11.00)  and  CIMB,reported a rise in their loan-to-deposit ratios (LDR) to 91% (+110bps q-oq) and  89.4%  (+250bps q-o-q) respectively.  We expect these banks to grow  deposits  more  aggressively  ahead,  and  this  could  exert  further upward  pressure  on  the  industry’s  funding  cost.  Together  with  the dilutive impact that new, lower-yielding loans will have on asset yields, we think net interest margin (NIM) pressure could pick up ahead.
• Capital.  We  believe  that  concerns  over  capital  adequacy  have  eased following CIMB’s MYR3.6bn private placement. Group  CET-1 ratio  was 9.6%  as  at  end-1Q14.  There  could  be  a  further  50-60bps  lift,  pending discussions with Bank Negara (BNM) on  loan loss reserves that need to be set aside (its collective allowance and regulatory reserve was 2.2% of net loans vs BNM’s stipulated 1.2%). Management has targeted a CET-1 ratio of 10% by 2016, and the quicker this is achieved, the better, as this may provide it with more options to manage capital and ROEs ahead.
• Forecasts. We lower  our FY14F/FY15F net profit projections by 4%/3% respectively,  mainly on  factoring in:  i)  a  wider NIM compression of 9bps for FY14F (from -5bps), followed by a 4bps contraction for FY15F (from  -1bp); and ii) a 2% reduction in our FY14F non-interest income.
• Investment  case.  We  reduce  our  GGM-derived  FV  to  MYR7.75  from MYR8.40  after  lowering  our  ROE  assumption  to  13.2%  from  14%.  As such,  we  downgrade  our  recommendation  on  the  stock  to  NEUTRAL

Source: RHB