CIMB Group Holdings Bhd
(June 19, RM5.53)
Maintain hold with an unchanged target price of RM6: The outlook for 2015 is challenging. The bleak outlook for CIMB’s Indonesian operations will continue to weigh on the group’s earnings. CIMB Niaga accounts for about 30% of CIMB Group’s pre-tax profit, but this fell to 19% in financial year 2014 (FY14) due to heavy provisioning. In addition, capital markets are expected to be soft, which would limit CIMB’s ability to leverage its strong investment banking franchise.

Although CIMB’s Target 2018 (T18) strategy paints a positive picture for the group for the longer term, these new initiatives could further dampen earnings in the near term, before recovering once cost issues are resolved. The T18 initiatives aim to reduce cost-to-income ratio to below 50%. Supplemented by consumer banking to eventually contribute 60% of income, this would eventually lift return on equity (ROE) to over 15% by end-FY18.

Provisions were the main culprit for CIMB’s weak earnings in the past few quarters, and are expected to persist up to the second quarter (2Q) of FY15, especially at the Indonesian operations. To recap, 1QFY15 results came in at only 14% of our full-year earnings and we expect a weak 2Q before earnings stabilise in the second half of the year. Given that 2015 is a restructuring year under the T18 strategy, there will be one-off costs booked for staff and business rationalisation measures. On the whole, while we forecast 10% loan growth for 2015, this will be mitigated by lower net interest margin, which would cap top line growth.

CIMB is a “hold” with a RM6 target price based on the Gordon Growth Model, implying 1.3 times forecast FY15 book value. Our target price assumes 12% ROE, 5% long-term growth and 10% cost of equity. We believe the share price will not be rerated until there is a clearer indication of a pickup in its earnings momentum.

We have imputed a weak year for CIMB’s Indonesian operations, so a better-than-expected improvement would pose upside risk to our earnings forecasts. 

Meanwhile, a sharp pickup in capital market activities in Malaysia would also boost earnings. — Alliance Research, June 19

This article first appeared in The Edge Financial Daily, on June 22, 2015.