This article first appeared in The Edge Malaysia Weekly, on January 18 - 24, 2016

CIMB Group Holdings Bhd’s stock has taken a thumping this year, diving to a 6½-year low of RM4.01 last Friday — its eighth consecutive day of decline — mainly on concern that the banking group may undertake a cash call to boost its capital levels.

That, combined with concern over its asset quality, particularly in its Indonesian operation, and the overall weaker prospects anticipated for banks this year given the more sluggish economy, will continue to weigh on the stock and may push it below the RM4 level soon, say analysts that The Edge spoke to.

The stock hasn’t closed below that level since July 13, 2009. “We don’t think it’s time to bottom fish yet,” one remarks.

CIMB’s stock has fallen by 11.7% so far this year, leading the declines in banking stocks that include RHB Capital Bhd (-8.1%), Alliance Financial Group Bhd (-5.9%) and Affin Holdings Bhd (-4.3%). In comparison, the KL Finance Index and the FBM KLCI have slumped 3.3% and 3.8% respectively.

“A combination of several factors has led to the share price weakness, but it’s the concern about a potential capital call that’s the main one at this point in time. With the share price quite weak, if you do a rights issue, the dilution [in shareholding value] will be quite significant,” says an analyst from a local research house.

While CIMB has been consistent in its message to analysts and investors that it has no immediate plan to undertake a rights issue, that concern nevertheless persists. Analysts first highlighted that there was growing risk of a cash call after CIMB released its third quarter results last November.

CIMB’s Common Equity Tier-1 (CET-1) capital ratio, already one of the lowest in the banking industry, slipped further to 9.3% in the third quarter ended Sept 30, 2015 (3QFY2015).

“A combination of factors such as elevated loan provisioning, restructuring costs and forex translation impact on risk-weighted assets, led to [the group’s] CET-1 ratio slipping by another 40 basis points quarter on quarter to 9.3%, with the fully-loaded ratio 20 to 30 basis points lower than [that]. We think the risk of a capital call has risen further on the back of the latest numbers,” RHB Research says in a report on Nov 26 following the release of the 3Q2015 results.

RHB Research has a “sell” call on CIMB, with a target price of RM4.15.

Bloomberg data shows that of at least 24 analysts that track CIMB’s stock, most, or 11, have a “hold” recommendation, while seven have a “sell”, and six, a “buy”. Their target prices ranged from as low as RM3.60 to as high as RM7.05. The average 12-month target price was RM4.90.

Adding to the concern about CIMB is the fact that its earnings have fallen short of expectations. Its nine-month net profit in FY2015 fell by 30% to RM2.02 billion, accounting for just 64% of analyst consensus estimates for the full year. The poorer performance came about because of substantially higher loan loss provisions made, largely in Indonesia, amid a deterioration in asset quality as well as restructuring costs.

CIMB has guided that provisions will remain at an elevated level in 4Q2015. The challenging operating environment, both at home and overseas, means that concerns over top-line growth and asset quality issues will likely persist in 2016, RHB Research says.

“I think we need to wait and see how they end 2015 — see where their capital level is, how their asset quality is holding up. If things are still looking cloudy and Indonesia shows no improvement, it may not be time to pick up their shares yet,” a banking analyst with a “sell” call says.

Last year, the group reduced its staff count by 1,891 in Malaysia and 1,708 in Indonesia under a mutual separation scheme aimed at cutting costs and improving efficiency.

Just last Friday, Bloomberg reported that CIMB cut 32 jobs from its Hong Kong investment banking and equities operations, which is the equivalent of about a fifth of the group’s approximately 150 investment banking staff there.

CIMB “is not spared from the harsh realities of the deteriorating capital markets faced by players with investment banking and equities businesses in Asia,” CIMB’s group CEO Tengku Datuk Seri Zafrul Aziz told the newswire.

“I suspect that it’s been more foreign selling on the stock of late, on the back of the weaker financial results and perception of slow recovery. At this price level, it’s still too volatile to catch,” says one banking analyst.

Indeed, the foreign shareholding level in CIMB has been on a decline. It stood at about 27% as at last November, a new multi-year low, and below the trough of 31.3% seen in November 2008. “It may have hit a low, but on a percentage basis, 27% is still quite high,” the earlier analyst points out.

CIMB’s largest shareholder is Khazanah Nasional Bhd with a 29.71% stake, followed by the Employees Provident Fund with 17.44%. Mitsubishi UFJ Financial Group Inc, as a company, owns about 4.56%.

“The stock is likely going to be weighed down by the capital concerns until something is actually done about it. Unlike Maybank (Malayan Banking Bhd), which tends to get share price support from its biggest shareholder Permodalan Nasional Bhd, CIMB doesn’t get the same from Khazanah,” says an analyst from a foreign research firm.

Last Wednesday, CIMB announced that Zafrul would take on an additional role as CEO of CIMB Bank Bhd from Jan 20. The previous CIMB Bank CEO, Datuk Sulaiman Mohd Tahir, left last year to take on the top job at rival AMMB Holdings.

Zafrul will step down from his position as CEO of CIMB Investment Bank Bhd. The current deputy CEO of the investment bank, Datuk Kong Sooi Lin, will be the person in charge in the interim.

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