CIMB Group - Better outlook for non-interest income Buy

- We are upgrading CIMB Group Holdings Bhd (CIMB) to a BUY from HOLD previously, with a higher fair value  of RM8.70/share (vs. RM8.00/share previously). This is based on an ROE of 15.7% (14.9% previously) FY12F and a fair P/BV of 2.3x (2.1x previously).

- We expect non-interest income to surprise on the upside and to be sustained ahead, given several large IPO mandates which had materialised. In addition, CIMB has disclosed that the marked-to-market (MTM) gain for  its securities available-for-sale was RM639mil in 1QFY12, higher than the reported RM536mil MTM gain in 4QFY11.  

- The current share price implies a non-interest income of RM3.4bil FY12F, which is RM450mil or 12% lower than our current forecast of RM3.8bil FY12F (FY11: RM3.7bil).

- In other words, the share price implies that non-interest income will return to the level before FY07’s RM3.6bil. (Note that FY08’s non-interest income was much lower at RM2.6bil, but this was affected by a loss on its securities held-for-trading of RM201mil due to the  2008 crisis (FY09: gain of RM536mil)). As a gauge, noninterest income had since been sustained at RM3.7bil in FY09, RM3.9bil in FY10 and RM3.7bil in FY11. 

- Also, this implies that there is no impact from CIMB’s recent acquisition of RBS with a total consideration of RM849mil at P/BV of 0.92x. Assuming ROE of 12%, we reckon that the underlying non-interest income that should be generated from RBS is RM111mil per year.  

- We also foresee no impact from newsflow on Asia Petroleum Hub (APH), in which CIMB is reported to have a loan exposure of RM840mil. Assuming that RM500mil had been provided for, we estimate a further RM340mil loan loss provisioning required. However, we have already forecast a high loan loss provisioning of RM894mil for FY12F. Our credit costs assumption is now 45bps vs. 30bps in 1QFY12 and the company’s guidance of 31bps FY12F. 

- All in, the share price is now implying net earnings of RM3.9bil (our forecast: RM4.3bil, consensus: RM4.2bil) and ROE of 14.6% (our forecast: 15.7%, consensus: 15.6%, company’s target: 16.4% FY12F). We believe this is too low given better prospects for non-interest income, while loan loss provision is unlikely to be much higher than our estimates. We expect the following rerating catalysts for CIMB: (a) sustainability in  noninterest income; (b) loan loss provisioning and credit costs unlikely to worsen significantly.

Source: AmeSecurities