This article first appeared in The Edge Financial Daily, on October 23, 2015.

CIMB Group Holdings Bhd
(Oct 22, RM4.89)
Maintain sell and a target price (TP) of RM4.15: CIMB Group’s (CIMB) management meeting on Wednesday 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 the second half of 2015 (2H15) and now thinks that on a full-year basis, 2015 is likely to be the peak for credit cost (between 50 and 80 basis points [bps] versus 2014: 61bps). 

Amid concerns about asset quality, tighter liquidity and capital preservation, CIMB is more cautious about 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. 

Management believes group common equity tier-1 (CET-1) ratio of 11% should comfortably cover the various capital buffers required. As at the end of second quarter, group CET-1 ratio was 9.7%, with the fully-loaded ratio 30bps to 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.

CIMB is revisiting its 2018 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. 

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. — RHB Research, Oct 22