Maintain SELL and a MYR4.15 TP. There were no major developments from yesterday’s meeting. CIMB does not see an imminent capitalraising exercise but did not discount the possibility of such a need. We think this overhang may likely keep its share price performance muted. Investors may also be disappointed that loan provisioning in Indonesia is expected to stay elevated due to the commodities portfolio.

Capital raising – no intention for now but not totally ruling out the need for one later. Recall that the group CET-1 ratio as at end-Sep 2015 was around 9%, one of the lowest among the domestic banks. Despite that, management does not see an imminent need to raise capital at this juncture as the level was sufficient for growth and some risk-weighted asset (RWA) initiatives should kick in in 4Q15. However, management did not rule out the possibility that a capital call may be required further down the road.

Update on asset quality. Management believes its asset quality issues in Thailand remain contained. For Indonesia, loan provisioning remains elevated due to its commodities portfolio but asset quality for the SME and retail books was still intact. Domestically, asset quality has held up, although management expects some deterioration to set in this year due to the challenging macro environment. This is consistent with our view.

Update on cost management initiatives. With respect to recent job cuts for its investment banking (IB) business in Hong Kong, management said this was in light of the challenging environment there and forms part of an ongoing review of its non-ASEAN business. The impact is not expected to result in any meaningful impact on both revenue and costs.

4Q15 deposit competition was less intense than expected earlier. A positive development was that, according to management, deposit competition in 4Q15 panned out to be milder than expected and was not as intense as 4Q14. There was no change, however, to its expectations that 2015 net interest margin (NIM) compression should still be c.20bps guided earlier.

Forecasts. No change to our earnings forecasts.

Investment case. We keep our GGM-derived TP of MYR4.15 and SELL recommendation. We see no upside catalyst while the key downside risk to our TP is a capital-raising exercise, where we estimate CIMB may need to raise MYR4bn-6bn (12-18% of market capitalisation) in order to raise its CET-1 ratio to 10.5-11%. We will reassess the group’s capital requirements upon the release of its 4Q15 results next month.

Management Meeting Highlights CIMB held a meeting with analysts yesterday. We set out the salient points from the meeting below. Capital raising – no intention for now but not totally ruling out the need for one later. Recall that the group CET-1 ratio as at end-Sep 2015 stood at 9.3%, with the fully-loaded ratio 20-30bps lower. Management maintained that there were no plans for an equity-raising exercise at this juncture as the level was sufficient for growth. Also, some RWA initiatives should kick in in 4Q15. Having said that, management did not rule out the possibility that a capital call may be required further down the road but before tapping shareholders for funding, CIMB will need to ensure that efficiency and optimisation issues have been ironed out.

Update on Indonesia. According to management, loan impairment allowances there remain high due to the deterioration in collateral values for its commodity portfolio. Management stressed that provisioning issues are confined to the existing commodities portfolio while asset quality for the SME and retail books is still robust. There were no further NPL sales in 4Q15. Looking ahead to 2016, CIMB expectsloan impairment allowances to ease from 2015’s levels. In terms of NIM, 2015 NIM should coe in slightly better than expected due to ample liquidity and strong CASA growth. Nevertheless, going forward, management still expects NIM to trend lower due to falling asset yields arising from the rebalancing of the loan portfolio towards lower yielding working capital loans and mortgages.

Update on CIMB Thai. In its recent 4Q15 results, CIMB Thai’s gross non-performing loans (NPL) ratio declined to 3.1% from 4.3% at end-3Q15 due to the sale of NPLs to an external party (size of the NPL sold was not disclosed). Excluding this, management said there was some uptick QoQ in NPL due to commodity-related commercial loans as well as auto loans. As mentioned previously, management thinks asset quality issues are likely to have peaked last year. Going forward, CIMB’s focus is to right size the retail business model, which is currently in a slight loss position. Management has no plans to dispose of CIMB Thai.

Domestic asset quality still resilient. As for the domestic segment, CIMB was comfortable with the asset quality of its corporate and SME books but thinks that the retail segment (mainly from the low income group) could see some weakness ahead. The earlier rise in delinquencies for retail loans during the festive season in 3Q15 had normalised post quarter-end. While domestic asset quality trends have been relatively benign, management thinks impaired loans and credit cost would riseahead due to factors such as: i) impaired loans and credit cost are coming from a low base, ii) rising cost of living, and iii) weaker consumer spending. Finally, CIMB said that rescheduled and restructured (R&R) loans from its overseas operations will be classified as impaired in the upcoming 4Q15 results, consistent with the treatment for domestic R&R loans. The impact to the impaired loan ratio and loan impairment allowances, however, would not be significant.

Update on cost management initiatives. With respect to recent job cuts for its IB business in Hong Kong, management said this was in light of the challenging environment there and forms part of an ongoing review of its non-ASEAN business. The impact is not expected to result in any meaningful impact on both revenue and costs.

4Q15 deposit competition was less intense than expected earlier. A positive development was that, according to management, deposit competition in 4Q15 panned out to be milder than expected and was not as intense as 4Q14. Possibly, this may have been due to banks already meeting regulatory requirements on liquidity. As such, management does not expect 4 Q15 funding cost to be significantly higher than 3Q15 but on a full-year basis, CIMB thinks NIM compression should still be around the 20bps guided earlier.

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, and v) favourable forex movements, which will positively impact the translation of its foreign subsidiaries’ results.

Forecasts No change to our earnings forecasts. Stripping out the restructuring costs in 2015F, we project 2016F underlying net profit to rise 12% YoY, aided by a combination of: i) operating income growth of 4% YoY, ii) cost savings of c.MYR500m from last year’s cost management exercise, and iii) 1ppt drop in the effective tax rate. Our numbers are below consensus, likely due to our more conservative stance on credit costs.

Valuations and recommendation We leave our GGM-derived TP of MYR4.15 unchanged. 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%. Although the stock’s share price has reached our TP, we are keeping our SELL call unchanged for now. The key downside risk to our TP is a capital-raising exercise. Based on CIMB’s group CET-1 ratio of c. 9% as at end-Sep 2015, we estimate CIMB may need to raise MYR4bn-6bn (12-18% of current market capitalisation) in order to raise its CET-1 ratio to 10.5-11%. By our calculations, this could dilute 2016F-2017F ROEs to 8.5-9% as compared to the 9.2% ROE currently forecasted for both 2016 and 2017. As mentioned above, management expects some RWA initiatives to kick in in 4Q15. As such, we will reassess the group’s capital requirements upon the release of its 4Q15 results next month.

Source: RHB Research - 21 Jan 2016