We retain our SELL call and MYR5.20 TP (14% downside). 1Q15 net profit was 14-15% of our/consensus full-year estimates as bottomline was hit by restructuring costs, weaker-than-expected NIM and high loan provisioning. CIMB now thinks it will be a challenge to achieve its 2015 ROE target of 11% (ex-restructuring costs). Our 2016-2017F ROEs of 10-10.5% factor in annual cost savings of MYR500m.

• CIMB reported 1Q15 net profit of MYR580m (-46% YoY, +190% QoQ), ie 14-15% of our and consensus 2015 net profit estimates respectively. Key variances were: i) MYR202m restructuring cost relating to investment banking (IB), and ii) sharper-than-expected net interest margin (NIM) compression of 19bps YoY (vs our earlier -7bps expectation) due to more aggressive deposit-taking activities domestically. 1Q15 credit cost was also high at 80bps, annualised (vs40-50bps guidance) due to the group’s coal exposure in Indonesia, but this should ease in the quarters ahead.
• Results highlights. The main positive takeaway was the decent start to 1Q15 non-interest income (+2% YoY, +21% QoQ, ex-lumpy gains from asset sales), which made up 25% of our 2015 forecast thanks to lower marked-to-market losses on the trading portfolio and stronger fee income (+6% YoY, +8% QoQ). Otherwise: i) annualised loan growth of 8% was below our 9% assumption and CIMB’s 10% target, ii) NIM compression was sharper than expected, iii) cost-to-income ratio (CIR) was still elevated at 58% (ex-restructuring cost), iv) asset quality deteriorated (see below), and v) the 2015 ROE target of 11% (ex-restructuring costs) now looks challenging, given 1Q15’s underlying ROE of just 8%.
• Loan and deposit growth. 1Q15 loan growth was driven by the retail and commercial segments. Annualised deposit growth was 21% (+13% YoY) due to more aggressive deposit-taking activities locally, resulting in the loan-to-deposit ratio (LDR) declining QoQ to 89% (4Q14: 92%; 1Q14: 89%). Growth was mainly driven by fixed deposits, but the resulting impact was higher funding costs and NIM compression.
• Asset quality. Absolute gross impaired loans rose 5% QoQ (+16% YoY) due to the deterioration in asset quality in Indonesia and Thailand. However, due to higher allowances made, loan loss coverage (LLC) rose to 84.2% from 82.7% at end-4Q14 (end-1Q14: 83.8%).
• Forecasts and investment case. We lower 2015-2017 net profit projections by up to 16% due to the weaker-than-expected results.Maintain SELL and GGM-derived TP of MYR5.20.

Briefing highlights Further details on restructuring costs. According to management, the MYR202m restructuring cost involved slightly over 160 personnel from Australia as well as other Asia-Pacific markets. Management guided for annual cost savings of MYR200m from this exercise.

As for the recently-announced Mutual Separation Scheme (MSS), more details will only be shared later as the closing date is end-May. The last MSS exercise was back in 2013 for the domestic commercial bank, which saw 1,217 personnel take up the offer. The exercise cost CIMB MYR217m while management guided back then for annual cost savings of MYR130m, ie restructuring cost was 1.7x annual cost savings. CIMB said the cost of the MSS this time could double that of 2013 as it also involved its Indonesian operations. Management reiterated that there was no impact onrevenue with respect to the aforementioned cost-cutting measures for IB and, similarly, does not expect the MSS to impact revenue. This is because the focus of the MSS is on backroom and middle office personnel, while management does not expect take-ups from frontliners. On the whole, management appeared optimistic the group is on track to achieve its T18 target of annual cost savings of MYR400m-600m.

Notwithstanding management’s optimism above, we highlight the possibility that the MSS take-up rate may be dampened by the current soft economic environment, which means that the overall cost savings may come in at the lower end of the targeted range. For now, we have assumed the MSS exercise results in annual cost savings of MYR300m and upfront MSS cost of MYR500m (ie c.1.7x annual cost savings from the MSS). Together with the IB cost savings and restructuring expenses above, we factored in total restructuring cost of MYR700m in our 2015F numbers and cost savings of MYR500m pa from 2016F onwards.

2015 ROE target may not be achieved. On the back of the 1Q15 results, management thinks that its 2015 ROE target of 11% (ex restructuring costs) is now a stretched target. CIMB cited higher-than-expected NIM pressure and challenging economic conditions as key challenges to the target. While CIMB had earlier guided for NIM compression of 5-10bps, management now thinks NIM may compress by around 20bps.

Following from the above, we now assume NIM to compress by 14bps/11bps/5bps from 7bps/5bps/5bps in 2015/2016/2017 respectively. This factors in stronger growth in deposits (we assume LDR of 89% going forward) for 2015 as well as funding cost pressures, as higher cost fixed deposits are relatively easier to grow compared to current and savings account deposits.

Minimal impact from new policy document on rescheduled and restructured (R&R) loans. Management remained comfortable with the domestic asset quality and does not expect any negative surprises. As for the new guideline on R&R loans, CIMB said the impact would be minimal on both loan impairment allowances (provisioning based on accounting standards would have covered this) and impaired loan classification.

Risks The risks include: i) stronger-than-expected loan growth, ii) better-than-expected NIMs, iii) stronger-than-expected capital market activities, iv) asset quality holding up well, v) favourable forex movements, which should positively impact the translation of its foreign subsidiaries’ results, and vi) good execution of T18.

Forecasts We lower our 2015/2016/2017 net profit projections by 16%/3%/5% respectively after taking into account the above changes to our forecasts, as well as some fine-tuning. We also lower our 2015-2017 DPS projections by up to 15%, based on an unchanged payout ratio of around 40%.

Valuations and recommendation We make no changes to our GGM-derived TP of MYR5.20. Our GGM assumes: i) cost of equity of 10%, ii) long-term growth of 5.5%, and iii) sustainable ROE of 10.5%. Our TP is based on 2015F P/BV of 1.1x, at a discout to the 10-year average of 2x. We think this is fair, given lower projected ROEs of 10.2-10.4% (2016-2017) ahead due to lower returns and more stringent capital requirements vs the 10-year average ROE of 14%.

We maintain our SELL call on the stock. We expect another round of earnings downgrades from consensus to factor in, among others, weaker-than-expected NIMs as well as restructuring costs. Likely, ROE expectations ahead would be revised as well. Our revised 2016F-2017F ROEs of 10-10.5% are still lower than CIMB’s 2015 target of 11%, despite having factored in the cost management initiatives (lower ROE expectations will have an impact on GGM-derived target prices). Going forward, much will be riding on T18 and execution risk is high while the track record is mixed. Finally, dividend yields currently are about 2.6-3.6%, which are not too attractive in our view (relative to some of the other banks) to tide investors through this transitionperiod.