This article first appeared in The Edge Financial Daily on August 1, 2018 - August 7, 2018

CIMB Group Holdings Bhd
(July 31, RM5.84)
Maintain hold with a lower target price (TP) of RM6.30: The key takeaway from our company visit is that second quarter financial year 2018 (2QFY18) results will likely be subdued for the group, amid topline weakness in both net interest income (NII) and non-interest income (NOII).

Corporate lending remains weak both domestically and in Indonesia, while net interest margin (NIM) compression is expected to persist, especially at Niaga. Debt and equity capital market activity, meanwhile, has been soft. On the flip side, better-than-expected credit costs could provide some buffer.

Management maintains its guidance for a five to 10 basis points (bps) compression in margins in FY18 and in the near term, Niaga’s margins are expected to contract as a result of the rate hikes in Indonesia. We raise our FY18 group NIM compression forecast to nine bps from five bps previously and impute a slightly larger 15% year-on-year (y-o-y) contraction in NOII (12% previously). Our credit cost is nevertheless trimmed to 52bps for FY18 from 58bps and maintained at 55bps for FY19. As a result, our group net profit forecast is trimmed by 2-3% for FY18 to FY20.

The management’s return on equity (ROE) target of 10.5% for FY18 takes into account the recent RM152 million gain from the disposal of its overseas stockbroking operations to China Galaxy and would be about 10.2% excluding this gain. This compares against our revised FY18 ROE forecast of 9.6%. — Maybank IB Research, July 31