CIMB GROUP HOLDINGS - Final stage in sale of insurance arm

- The press, citing sources, has reported that Sun Life Financial from Canada, and Malaysian state investment unit Khazanah Nasional (Khazanah) have agreed to buy Aviva’s Malaysian insurance joint venture with lender CIMB – CIMB Aviva – for about RM1.7bil (USD563mil). The deal is expected to be signed today.

- The reported RM1.7bil price tag is higher than an earlier news report which quoted the total value at slightly more than RM1bil.

- CIMB Aviva is a joint venture, with CIMB holding a 51% stake and Aviva plc the remaining 49% stake. British-based Aviva plc was reported to be exiting marginal markets across the world.

- CIMB’s plans to sell its entire stake, instead of partial stake is new, and is positive as it means that CIMB will now be able to realise its stake in CIMB Aviva.

- This is expected to help shore up CIMB’s capital in two ways:- (a) realisation of stake; (b) as insurance is likely to be classified as non-core asset, this will also reduce the requirement to set aside a risk weight of 1250% to the non-financial commercial subsidiaries.

- Assuming a sale price of RM1.7bil, we estimate that CIMB would be able to realise RM867mil from its 51% stake. The 51% stake in CIMB Aviva is held indirectly under the listed holding group and not the bank.
Thus, this would help in shoring up CIMB’s group common equity ratio, which is estimated at 7.7% as at end-September 2012 (before including any sale of CIMB Aviva, or consolidation of Bank of Commerce, the Philippines and RBS – for the latter two, this is estimated to shave off about 35bps to 40bps from the capital).

- With no further details on the risk-weight assigned to CIMB Aviva’s asset base, we estimate the release of RM867mil will add about 20bps to the group’s common equity ratio, which will bring this up to 7.9% as at end-September 2012 from 7.7%. CIMB Aviva’s contribution to pretax profit is minor at RM37.5mil for 9MFY12. The news on the possible insurance sale is positive given that now CIMB is selling its entire, and not partial stake as well.

Source: AmeSecurities