CIMB Group - Priced in much slower growth ahead

We are maintaining BUY on CIMB Group Holdings Bhd (CIMB), with an unchanged fair value of RM8.00/share, based on an ROE of 14.9% FY12F and fair P/BV of 2.1x.

CIMB posted net earnings of RM1,133mil for 4QFY11 (+11.9% QoQ), bringing the total to RM4,031mil for FY11. This included a one-off revaluation gain of RM250m from the deconsolidation of CIMB Aviva. Stripping this off, net earnings would be 9.6% below our estimate and 5.0% below consensus estimates. 

What is positive in the 4QFY11 results is the strong CASA performance, with total CASA deposits for the group up 6.3% QoQ. This raised CASA contribution to 34.5% in 4QFY11 from 33.0% in 3QFY11. This indicates an improving deposit-taking franchise for CIMB, with the bulk of the increase coming from Malaysia and Singapore. 

In addition, if we were to strip off the one-off gain of RM250mil related to CIMB Aviva, the total pre-tax profit for both its corporate investment banking (CIB) and treasury and investment banking division fell by only 13.9% QoQ and 27.9%, respectively. We believe that the performance is resilient, considering that 4QFY11 was reflective of soft capital market activities, while the previous 4QFY10 included several lumpy fee income from mega deals. 

Gross impaired loans were lowered by 4.0% QoQ in 4QFY11, which is an improvement from the ptick of 1.2% in 3QFY11. Gross impaired loans ratio was reduced to 5.1% from 5.5% in 3QFY11.  Loan loss cover was raised to 81.1% from 80.0%. Credit costs rose to 61bps from 23bps in 3QFY11 (2QFY11: 20bps). Part of the increase was attributed to changes in the basis for estimates of its probability of default. Thus, we would interpret this as more of changes in data estimates rather than any major deterioration in collateral values.  4QFY12’s earnings were no doubt boosted by the one-off gain of RM250mil, but core underlying operations were not as weak as feared. 

At the current share price, the market is pricing a lower ROE of 14%, with either two scenarios:- (1) credit costs will shoot up to 81bps for FY12F (we have modelled in 54bps), with an implied loan loss provision of RM1,555mil (our estimate is RM1,044mil; FY11’s was RM487mil). The company has unveiled a new ROE target of 16.4% for FY12F;  or (2) non-interest income will fall substantially. We believe this is unlikely, given indications of continuing healthy pipeline. We maintain our stance that CIMB has already priced in an almost worst-case scenario, in terms of credit costs. Rerating catalysts are:- (a) higher-thanexpected ROE guidance for FY12F; (b) better-thanexpected credit costs and NPLs.   

Source: AmeSecurities