CIMB expected to achieve key targets but risk keeps on lingering

Analysts say the banking group would meet its targets for FY17, except for loans growth


Cimb Group Holdings Bhd is expected to achieve its key targets, but worries over rising provision and lower contributions from foreign subsidiaries would hurt earnings.

Malaysia’s second-largest bank based on asset recently saw shareholder Mitsubishi UFJ Financial Group Inc selling its entire 412 million shares, or a 4.6% stake, in CIMB.

Khazanah Nasional Bhd, CIMB’s largest shareholder, last week launched the sale of 90.5 million of its shares in CIMB in the indicative price range of RM6.13 to RM6.24, which would raise up to RM564 million.

Analysts said the banking group would meet its targets for the financial year ending Dec 31, 2017 (FY17), except for loans growth.

They are also worried about the slump in CIMB Thai Bank pcl’s dismal earnings.

AmInvestment Bank Bhd had maintained the ‘Hold’ call on CIMB with an unchanged fair value of RM6.70 per share, based on a FY18 price-to-book value of 1.2 times on the back of return on equity (ROE) of 10.4%.

The research house said provisions would continue to dampen the group’s Thai business going forward.

CIMB Thai’s net profit fell 82% year-on-year (YoY) to 76.5 million baht (RM9.8 million) in the third quarter ended Sept 30, 2017, due to high impaired loan allowances and operating expenses.

But the unit’s contribution to the group profits for FY17 will remain insignificant at under 5%.

Public Investment Bank Bhd maintained its ‘Neutral’ call on the bank with a target price of RM6.40, noting that the lender’s performance remains priced-in for now.

“While there remains scope for further earnings upsides at the group level, especially if its regional exposures make quicker than expected turnarounds, the much-awaited improvement in its Thai operation is seemingly still elusive,” it said.

The research firm is also wary on the sustainability of the group’s net interest margin of 3.88% for the first nine months of the year compared to 3.81% in the first half of 2017 (1H17), as it does not see significant topline improvements in the near to medium terms.

While gross loans grew 2.1% year-to-date (YTD), the growth has been weak owing to a deliberate move in shrinking the group’s small and medium enterprises (SMEs)-related book to protect asset quality.

“What worries us more is the 5.1% YoY decline in deposits during the corresponding period. Modified loan-to-deposit ratio is at 99.4%,” Public Investment said.

It added that CIMB’s gross non-performing loans ratio is higher at 5.7% compared to 5.4% as at 1H17, with the lower YTD numbers due largely to the sale of some non-performing loans in 1Q17, while loan loss coverage stood at 85.1%.

MIDF Amanah Investment Bank Bhd noted in an analyst briefing with CIMB’s management recently, the banking group expects to meet its FY17 ROE of 9.5%, cost-to-income ratio of below 53% and credit cost of 60 to 65 basis points.

“However, the group could potentially miss its loans growth target of 7% YoY,” it said.

The group is consolidating its loans portfolio. It reduced its exposure in auto loans in Indonesia and SME loans in Thailand.

The research firm has upgraded CIMB to ‘Buy’ from ‘Neutral’ with an unchanged target price of RM7.10, based on projections for the bank’s Malaysia business to continue carrying the group forward.