Maintain SELL and MYR4.15 TP (17% downside). At yesterday’s meeting, CIMB guided for credit cost to stay elevated in 2H15, resulting in credit cost peaking in 2015. Apart from loan provisioning, restructuring costs and volatile bond yield movements have impacted capital. While CIMB does not see an imminent capital-raising exercise, we sense the tone regarding such a possibility has changed.

Asset quality still in focus. CIMB’s management meeting yesterday focused on asset quality. Management believes its asset quality issues in Thailand remain contained. That said, the deterioration in macroeconomic conditions has raised the risk that the weakness in asset quality in Indonesia may spread beyond the commodities segment (no signs thus far from CIMB’s books) while domestically, delinquencies for the retail segment have seen an uptick. CIMB is guiding for credit cost to stay elevated in 2H15 and now thinks that on a full-year basis, 2015 is likely to be the peak for credit cost (between 50-80bps vs 2014: 61bps).

Slower loan growth in 2H15. Amid concerns over asset quality, tighter liquidity and capital preservation, CIMB is more cautious on credit growth and expects growth to decelerate in 2H15. The slowdown will mainly come from the retail segment. This will also be in line with management’s efforts to improve risk-adjusted returns as CIMB has found it more difficult to reprice for risk in the retail space.

Capital. Management believes a group common equity tier-1 (CET-1)ratio of 11% should comfortably cover the various capital buffers required. As at end-2Q15, group CET-1 ratio was 9.7%, with the fullyloaded ratio 30-50bps lower. Management does not see an imminent need to raise capital at this juncture, but we sense the tone of such a possibility has shifted.

Relooking at 2018 targets (T18). CIMB is revisiting its T18 targets that were revealed earlier this year, as the operating environment has changed since then. CIMB will need to reassess the need to accelerate the drivers and/or add to the cost initiatives to meet the earlier targets, as well as pushing back the timeline, among others.

Forecasts. No change to our earnings forecasts.

Investment case. We keep our GGM-derived TP of MYR4.15 and SELL recommendation. We believe the near-term risk of further earnings disappointment remains and suspect our below-consensus forecasts largely stem from our more conservative credit cost assumptions. We expect consensus to follow suit, especially post-release of results.

Management Meeting Highlights CIMB held a meeting with analysts yesterday. We set out the salient points from the meeting below. 2016 loan impairment allowances likely lower, but improvement may not be as significant as expected earlier. Asset quality was still a topic of focus during the meeting. For Thailand, management said that the soft spots for asset quality are still mainly due to the corporate/commercial and auto portfolios, although CIMB appeared optimistic that 2015 should see the peak with respect to asset quality issues. As for Indonesia, CIMB still believes that the weakness would remain confined to the commodities segment and does not expect any major asset quality issues from the other sectors. That said, the macroeconomic environment has been more challenging than expected and hence, management said that loan impairment allowances may continue to remain elevated in 2H15. As for the domestic segment, CIMB was comfortable with the asset quality of its corporate and small and medium-sized enterprise (SME) books but thinks that the retail segment could see some weakness ahead. Delinquencies for retail loans had risen during the festive season but at this stage, management did not think the issue was systemic. Finally, CIMB has not seen a pickup in domestic corporates requesting to reschedule or restructure their loans and it is still in discussions with the regulator as to whether rescheduled and restructured loan facilities in overseas markets should be treated as impaired.In terms of credit cost, CIMB guided for a longer-term, normalised credit cost of around 30-40 bps but in the near term, the figure would be elevated. For 2015, management guided for credit cost to come in above 50bps but lower than the 70-80bps reported in 1H15, with the bulk of the provision for 2015 due to Indonesia. For 2016, credit cost for Indonesia should improve, but this is expected to be partly offset by an uptick in credit cost for the domestic retail segment. Overall, management thinks credit cost should peak in 2015. Our credit cost assumptions are in line with management’s outlook, where we have assumed 2015F credit cost of 69bps (2014: 61bps) before easing to 64bps in 2016F.

Slower loan growth in 2H15. Amid concerns over asset quality, tighter liquidity and capital preservation, CIMB is more cautious on credit growth and expects growth to decelerate in 2H15. The slowdown will mainly come from the retail segment. This will also be in line with management’s efforts to improve risk-adjusted returns as CIMB has found it more difficult to reprice for risk in the retail space. Capital. Management believes a group CET-1 ratio of 11% should comfortably cover the various capital buffers required. As at end -2Q15, group CET-1 ratio was 9.7%, with the fully-loaded ratio 30-50bps lower. Management does not see an imminent need to raise capital at this juncture.

Treasury activities. With respect to the recent volatility in bond yields, management said the mark-to-market (MTM) impact was bigger on shareholder’s equity/book value (unrealised losses on its available for sale portfolio) rather than on the income statement. As for forex, the volatility has been positive in terms of volumes and spreads. That said, the weaker MYR has resulted in higher risk weighted assets for non-MYR loans, which would have a slightly negative impact on capital.

Relooking at T18 targets. CIMB is revisiting its T18 targets that were revealed earlier this year, as the operating environment has changed since then. To recap, the group’s 2018 targets are: i) ROE: >15%, ii) CET-1: >11%, iii) cost-to-income ratio(CIR): <50%, and iv) consumer banking to contribute c.60% of income. While no firm decision has been made yet, CIMB will need to reassess the need to accelerate the drivers and/or add to the cost initiatives to meet the earlier targets, as well as pushing back the timeline, among others. Management believes there is still room for further structural cost measures although this will unlikely be completed this year.

Deposit competition likely to intensify in 4Q15. This would partly be due to seasonality and the higher liquidity coverage ratio banks will need to adhere to next year.

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

Forecasts No change to our earnings forecasts. Our numbers are below consensus likely due to our more conservative stance on credit costs.

Valuations and recommendation Our GGM assumptions are: i) COE of 10.6%, ii) ROE assumption of 9.75%, and iii) 5.5% long-term growth. Our 2016 fair P/BV of 0.84x is 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 the risk of another capital call rises significantly.