CIMB Group - 2Q12 Tactical Trading Idea - 29 Mar 12

We still believe that investors should buy CIMB on dips and to position for the next recovery cycle. Recent media reports have suggested that CIMB Group Berhad (CIMB) could acquire a 60% stake in Bank of Commerce in Philippines at an undemanding valuation and 100% in RBS’s Asia Assets at a discount.  CIMB has made no official comment but we believe that it has started to position itself for the next recovery cycle.  While we are maintaining our MARKET PERFORM rating and our Target Price of RM7.90 at this juncture, we still believe investors should buy the stock on any dips to position for the next recovery cycle.  We believe that CIMB could potentially offer a low-risk trading opportunity over the next 2-3 months on the back of its satisfactory FY11 result.

Rationale behind the acquisition:  CIMB has identified Philippines as one of its priority markets and we believe it is considering acquiring a stake in Bank of Commerce given (1) Philippines’s importance in completing its Asean aspiration; (2) for better growth opportunities here and (3) BOC’s full-fledged banking business model is in line with its targeted strategy. Meanwhile, we believe CIMB may be interested in acquiring RBS’s assets in Asia given (1) the leverage on a recovering local equity market; (2) giving its regional ambitions a shot in the arm and (3) the attractive discount price.

Risk of lower growth in CIMB Niaga.   Bank Indonesia has imposed new higher minimum LTVs on the industry here. Niaga’s exposure in mortgage & auto loans account for 17.5% of its total loans, which in turn account for approximately 5% of the entire total loans for CIMB Group. Hence, the impact could be minimal in terms of growth for the group for now. As for CIMB Niaga growth rate, we are currently forecasting high teens growth for its total loan growth in 2012 as per the guidance of management (vs. FY11’s 20%).  However, with the new rules imposed, we expect its growth will now be slower. Currently, we are estimating 13% growth for the entire group but should these rules  lower Niaga’s growth by 1%, the group’s loan growth will be lower by 29bps. 

Growth aside, we also believe that Niaga’s interest margins are expected to be under renewed pressure in FY12 through a combination of the Central Bank policy action and as well as a heightened deposit and loan competition.  We reckon that a 50bps-70bps decline in its NIMs (to 4.9%-5.1%) is not entirely impossible.  

Valuation and Rating. CIMB’s share price has dropped by 22% since its peak on concerns over its earnings slowing down. The stock is now trading at 12.3x FY12 EPS (with an estimated ROE of 16.4%) as compared to its 10-year historical mean of 16.5x and marginally below its low in 2009 of 12.6x. At its current valuation, we believe the market could have priced in the risk of its slowing earnings growth already.   

Source: Kenanga