We maintain our GGM-derived PBV TP of RM6.35 (COE: 11.7%, TG: 2.0%, ROE: 10.5%) and OP call. CIMB appears to be releasing its remaining stake 25.01% in CGS-CIMB Securities to China Galaxy Securities (CGS) by January 2023, as reported. While no transactional value has been disclosed, we estimate the exercise will relieve CIMB of associate contributions of c.RM20m in FY22 and hence will not materially impact the group’s long term earnings. CIMB is one of our 4QCY22 Top Picks.

End of a 5-year partnership. As reported by The Edge Singapore yesterday, CGS-CIMB Securities CEO confirmed that CGS will be taking full control of the group by January 2023, indicating that CIMB would be disposing its remaining 25.01% stake. It appears that the disposal would be conducted via call and put option subscriptions although further details in terms of price and valuations are lacking. We estimate that it could be close to an indicative value of RM270m, based on an applied 1.05x PBV (also close to recent industry deals) on the past disposal and subject to USD rates.

Recall that CIMB had on 7 December 2021 disposed 24.99% of its stake in CGS-CIMB Securities together with its 25% holdings in CGS CIMB Holdings to China Galaxy International for a consideration of USD170.5m. That said, the entire disposal is not translative to CIMB’s complete exit from the stockbroking business as collaborative ventures with CGS could still be on the table.

Natural course of action. It was not surprising for CIMB group to eventually dispose its holdings in the 2018 joint venture-turned associate, given its recent release of control of the combined entity which was initially intended to facilitate greater access to the Chinese market. We reckon that the timing of the move could be ideal in a softer equities trading landscape as the CIMB group could reallocate resources to higher yielding operations.

Less appealing space. This move is not likely the last we see in terms of the disposal and consolidation of equities-related businesses for CIMB. We had seen ABMB entering a conditional sales agreement of its entire stockbroking business with Philip Capital in December 2021 and AFFIN recently monetising its stake in Affin Hwang Asset Management in August 2022 to reinvest into its core banking operations. The current downturn in equities markets may further causes financial institutions to reconsider their position in the markets, especially with looming macro uncertainties giving rise to further depression in treasury activities.

Post updates, we leave our FY22F/FY23F assumptions unchanged for now, pending the formal completion of the abovementioned transaction. Fundamentally, we had projected CGS-CIMB Securities, being the key associate earnings contributor, to generate c.RM20m in FY22. Additionally, the indicative disposal gains of RM270m in FY23F would only affect reported earnings by 4%.

Maintain OUTPERFORM and TP of RM6.35. Our TP is based on an unchanged GGM-derived PBV of 0.88x (COE: 11.7%, TG: 2.0%, ROE: 10.5%) with an applied 5% premium granted by CIMB’s 4-star ESG ranking thanks to headways in green financing. Fundamentally, the stock is supported by its regional diversification, especially in terms of NOII which most of its peers lack. CIMB’s return to double-digit ROE could be indicative of its prospects, led by better forward earnings growth (26% vs. industry average of 22%) while offering attractive dividend yields (6%) in the medium-term. CIMB is one of our 4QCY22 Top Picks.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 29 Sept 2022