CIMB Group - A vastly improved version 2.0 for wholesale banking BUY

- We are maintaining our BUY rating on CIMB Group Holdings Bhd (CIMB), with an unchanged fair value of RM9.70/share. This is based on an ROE of 15.8% FY13F and an unchanged fair P/BV of 2.3x.

- Recall that, following CIMB’s group-wide internal business reorganisation last year (dubbed CIMB 2.0), the wholesale bank now comprises two major business divisions, which are Investment Banking (IB) and Corporate Banking and Treasury and Markets (CBTM).

- As part of the revamp, CIMB consolidated all corporate lending and deposit taking, transaction banking, treasury and markets activities, and derivative activities under the division.  

- As such, there has been significant realisation of synergies between its corporate banking, investment banking and treasury capabilities. Version 2.0 now enables customised solutions which could include bundling of corporate advisory, financing and various treasury products such as foreign exchange services. These could also include provision of bridging loans for corporate undergoing corporate exercises.  

- Consequently, the CBTM division’s 9M pre-tax profit had grown by an impressive 32% YoY. The company said these came mainly from better cohesion in formulating forex and hedging solutions for corporate clients across the region.

- More importantly, CIMB hinted that the growth phase is still at an early stage. This is because traditionally, its relationship with corporate and wholesale clients had largely been in the lending space, and with room toexpand the relationship much further into treasury and forex solutions. 

- We reiterate our view that the base gross interest income for the group is unlikely to drop to the pre-2005 level of say RM1.5bil in FY04. Recall this was before CIMB’s full transformation into a universal bank. 

- We would argue that the base close-to-worst-case noninterest income should be at least RM2.5bil given the revamped platform. This implies a base ROE of 12.9% FY13F, net earnings of RM3.8bil and a base fair value of RM6.80/share FY13F. 

- At the current share price, this is pricing in a non-interest income level of RM3bil, which is not far off from our estimated close to worst-case scenario base of RM2.5bil (our forecast: RM.3.8bil). We expect the following  rerating catalysts for CIMB:- (a) sustainability in noninterest income; (b) better-than-expected asset quality; (c) assurance on adequacy of capital.    

Source: AmeSecurities