Maintain SELL, with a MYR4.15 TP (from MYR4.70, 8% downside). Asset quality may increasingly be at the forefront of investors’ concerns ahead, as we head into softer macroeconomic conditions. Loan provisioning has been elevated for four quarters now but yet, loan loss coverage levels have yet to improve meaningfully. Persistently weak earnings may start to raise concerns regarding capital adequacy.

Watching out for asset quality issues ahead. We believe asset quality will increasingly be at the forefront of investors’ concerns ahead as we head into softer macro conditions. Post the Global Financial Crisis (GFC), thus far, the group’s asset quality issues have largely stemmed from its coal exposure in Indonesia. We think Indonesia may continue to remain a soft spot in terms of asset quality and investors will need to continue keeping watch on CIMB Niaga’s special mentioned accounts. Asset quality in Thailand has also deteriorated but the impact is smaller at the group level. While domestic asset quality has held up well, we would not rule out the possibility of negative surprises, and the impact to P&L would be exacerbated by the group’s low loan loss coverage levels.

Forecasts. We lower our 2015-2017 operating income forecasts by up to 2% as we believe markets-related income may not recover meaningfully anytime soon, given the softer macroeconomic conditions. We also raise our 2015F/2016F/2017F credit cost assumptions to 69bps/64bps/55bps from 65bps/50bps/49bps respectively to factor in asset quality issues. Overall, we reduce our 2015F/2016F/2017F net profit by 4%/10%/8% respectively.

Investment case. We reduce our GGM-derived TP to MYR4.15 from MYR4.70. The revision takes into account the changes to our earnings projections above, and our rolling forward of valuations to 2016. Our GGM assumptions are: i) COE of 10.6%, ii) revised ROE assumption of 9.75% (from 10.5%), and iii) 5.5% long-term growth. Consequently, our 2016 fair P/BV falls to 0.84x from 1x, at a discount to the 10-year average of 2x. We believe this is fair, given lower projected ROEs of c.9.2% (2016-2017) ahead, due to lower returns and more stringent capital requirements vs the 10-year average ROE of 14%. No change to our SELL call on the stock. Apart from asset quality concerns, we highlight that should earnings stay persistently weak, this would eat into capital and concerns may arise regarding capital adequacy.