Maintain NEUTRAL and MYR4.50 TP (8% downside). There were no major surprises from yesterday’s meeting. CIMB shed more clarity on its RWA optimisation efforts, but said further enhancements would not be as significant as that in 4Q15. Topline growth has been challenging, while loan provisioning in Indonesia is expected to remain elevated in 1H16. That said, last year’s cost management initiatives should start to filter through and support profitability.

Further details on risk-weighted assets (RWA) optimisation. CIMB’s CET-1 ratio as at end-Dec 2015 rose 100bps QoQ to 10.3% (fully-loaded ratio: 10.1%). In the meeting, management said that the QoQ reduction in RWA was c.MYR16bn. This was on a combination of the sale of domestic wholesale loans and bonds – this was in lieu of the low risk adjusted return on capital (RAROC) for these assets and from the perspective of regulatory liquidity requirements – and data refinement. This includes ensuring ratings are up to date and the tagging of collaterals. CIMB estimates further RWA optimisation efforts could provide a further 30-50bps uplift to its CET-1 ratio. However, for a more significant uplift in a short span of time, management said this would require divestment of non-core assets and/or a capital-raising exercise. There are no expectations of such a need at this juncture.

Update on asset quality. Domestic asset quality has held up better than expected thus far and, according to management, CIMB has not seen any uptick in delinquencies or impaired loans. Management thinks that the low unemployment rate has been key in helping keep asset quality benign. That said, CIMB retained its guidance that Indonesia’s loan impairment allowances in 1H16 should remain elevated due to the need to top up on provisioning for its existing commodities portfolio. On a full-year basis, however, loan impairment allowances in 2016 for Indonesia should be lower vis-à-vis 2015.

Overall, topline growth remains soft, but last year’s cost management initiatives should filter through. A combination of slowing balance sheet growth, net interest margin (NIM) pressure and soft capital market conditions are expected to keep operating income growth subdued. However, last year’s cost management initiatives should filter through, and lower loan impairment allowances overall should be sufficient to provide a lift to bottomline growth. Forecasts and investment case. No change to our earnings forecasts, GGM-derived TP of MYR4.50 and NEUTRAL recommendation. On the whole, CIMB’s 4Q15 results had helped ease two of our concerns with respect to the stock, namely capital and asset quality. While we are generally cautious with respect to the prospects for banking stocks ahead – we believe asset quality could be heading for a softer patch as well as tighter liquidity conditions – CIMB may be ahead of the other banks. This is with respect to the loan provisioning cycle.

Management Meeting Highlights

CIMB held a meeting with analysts yesterday. We set out the salient points from the meeting below. Further details on RWA optimisation. Recall that the group’s CET-1 ratio – as at end-Dec 2015 – rose 100bps QoQ to 10.3% (fully-loaded ratio was 10.1%). Among the drivers for the improvement in capital ratio was RWA optimisation. In the meeting, management said that the QoQ reduction in RWA was c.MYR16bn due to a combination of: i. The sale of domestic wholesale loans and bonds – this was in lieu of the low RAROC for these assets, as well as from the perspective of regulatory requirements on liquidity; ii. Data refinement – this includes ensuring ratings are up to date and the tagging of collaterals. Another 30-50bps uplift from further optimisation. CIMB estimates further RWA optimisation efforts could provide a further 30-50bps uplift to its CET-1 ratio. Organic capital growth and redirecting capital to more efficient use would also help with capital. However, for a more significant uplift in a short span of time, management said this would require divestment of non-core assets and/or a capital-raising exercise. The recently announced sale of PT CIMB Sun Life is expected to add c.4-5bps to the CET-1 ratio. For a more meaningful impact, this would require the divestment of more sizeable assets, such as Touch ‘n Go and/or Bank of Yingkou Co Ltd. Domestic asset quality still resilient. Domestic asset quality has held up better than expected thus far and, according to management, CIMB has not seen any uptick in delinquencies or impaired loans. Management thinks that the low unemployment rate has been key in helping keep asset quality benign.

Expect loan provisions in Indonesia to stay elevated in 1H16, but to taper off thereafter. As for Indonesia, management retained its guidance that loan impairment allowances in 1H16 should remain elevated. This was due to the need to top up on provisioning for its existing commodities portfolio. On a full-year basis, however, loan impairment allowances in 2016 for Indonesia should be lower when compared to 2015. Overall, topline growth remains soft, but last year’s cost management initiatives ought to filter through. CIMB expects balance sheet growth to slow down this year, on the back of a softer macroeconomic backdrop and focus on RAROC. NIM is still expected to compress by 5-10bps due to pressure on asset yields from both Malaysia and Indonesia. Meanwhile, markets income was challenging in 1Q16, with fixed income and equities having had a tough quarter. However, forex income has held up. Over on the cost front, the full impact from last year’s mutual separation scheme (MSS) should be felt from 2Q16 (around 300 personnel in Indonesia who had accepted the MSS would have completed outstanding projects and left by then). While there are further pockets of cost management initiatives to be undertaken this year (eg the closing down of branches in Thailand and micro loan branches in Indonesia), these restructuring costs are not expected to be as significant as last year’s. CIMB guided for expenses growth of c.3% YoY and cost-to-income ratio of 53%. Risks Key risks include: i. Weaker-than-expected NIMs; ii. Sharper-than-expected deterioration in asset quality; iii. Soft capital market conditions; iv. Adverse yield and forex movements, which may erode book value and capital.

Forecasts No change to our earnings forecasts. Stripping out the restructuring costs in 2015, we project 2016F underlying net profit to rise 18% YoY. This would be aided by a combination of: i. Operating income growth of 4% YoY, albeit down from 9% YoY in 2015; ii. Positive jaws as last year’s cost management exercise kick in; iii. Lower credit cost of 63bps vs 77bps in 2015; iv. 1ppt drop in the effective tax rate. Valuations and recommendation We leave our GGM-derived TP of MYR4.50 unchanged. Our GGM assumptions are: i. COE of 10.6%; ii. ROE assumption of 10%; iii. 5.5% long-term growth. Our 2016 fair P/BV of 0.89x is at a discount to the 10-year average of 2x. We believe this is fair, given lower projected ROEs of c.9.3-9.8% (2016-2018) ahead. This is due to lower returns and more stringent capital requirements vs the 10-year average ROE of 14%. On the whole, CIMB’s 4Q15 results had helped ease two of our concerns with respect to the stock, namely capital and asset quality. While we are generally cautious with respect to the prospects for banking stocks ahead (we believe asset quality could be heading for a softer patch as well as tighter liquidity conditions), CIMB may be ahead of the other banks. This is with respect to the loan provisioning cycle. There is no change to our NEUTRAL recommendation.

SWOT Analysis

Source: RHB Research - 21 Apr 2016