CIMB Group Holdings Bhd
(May 21, RM5.86)
Maintain “sell” with a target price (TP) of RM5.50: CIMB Group Holdings Bhd’s (CIMB Group) first quarter of financial year 2015 (1QFY15) core net profit plunged 31% year-on-year (y-o-y) to RM731.6 million (headline net profit decreased 45.6% y-o-y), but this was already anticipated by consensus and Affin Hwang Invesment Bank Bhd (Affin Hwang). 

1QFY15 saw another quarter of heavy provisioning, as PT Bank CIMB Niaga Tbk’s allowances drove up group credit cost to an annualised 79 basis points (bps) compared with an annualised 19bps in 1QFY14.

Given that 2QFY15 will see another round of provisioning, management is expecting FY15’s overall credit cost to average at 40bps to 50bps, implying a relatively minimal level of allowances in the second half (2HFY15). (Affin Hwang’s credit cost forecast is 45bps in FY15 estimate [FY15E].) 

A staff rationalisation exercise amounting to RM202 million in 1QFY15 elevated overheads (an increase of 16.4% y-o-y) and lifted cost-income ratio (CIR) to 63.6%, but we expect overheads to gradually taper down in 2HFY15, with CIR to average 58% for FY15E (compared with management’s target of less than 55%). 

On a quarter-on-quarter (q-o-q) basis, core net profit increased four times owing to lower allowances. 

Despite achieving good loan growth traction of 12.8% y-o-y (with consumer and commercial banking at Malaysia, Singapore and Indonesia being the key drivers), operating profit growth was marginal at 4% y-o-y and flat q-o-q. 

Non-interest income growth has been minimal at an increase of 2.3% y-o-y as weak treasury gains mitigated fee income growth. 

Overall, consumer and commercial banking reported 11.2% y-o-y and 18.1% y-o-y growth respectively in pre-tax profits, while wholesale banking, group asset management and investments, and group funding reported sharply lower pre-tax profits. 

We reiterate our “sell” rating on CIMB Group at an unchanged TP of RM5.50 (based on an implied price- to-book value target of one time). At this juncture, we still do not foresee a strong rerating catalyst for CIMB Group — the challenging outlook in 2015 does not appear compelling for the capital markets.

Meanwhile, Target 2018 initiatives may not be impactful in the near term.

Key upside risks are cost savings above our expectations and turnarounds in capital and financing markets. — Affin Hwang Investment Bank Bhd, May 21.

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