CIMB Group - Signs of weakening strengths

Period  4Q12/FY12

Actual vs. Expectations  The FY12 PAT of RM4,344.8m was within the consensus forecast (101%) and that of ours (96%).

Dividends  The group announced a second interim dividend of 18.38 sen/share in cash with an optional Dividend Reinvestment Plan. The proposed DRP is within expectation as management has guided for this since the 3Q12 result announcement.

Key Result Highlights   The 4Q12 net interest income saw a moderating growth rate at +1.2% QoQ and 8.4% YoY to RM1,907.8m. QoQ, the +4.1% loans growth was strong while the loan-todeposit ratio was lower at 85.4%. The net interest margin narrowed by 5bps to 3.04 %, contributing to the flat net interest income growth. That said, the 11.8% YoY loan growth came in within our forecast of 11% but below the management’s guidance of 13%-14%. The moderating loans growth number was partly deflated by the IDR/RM depreciation.

 The 4Q12 non-interest income was sluggish at RM1,090.0m (-15.8% QoQ) due to lower investment and treasury gains and the weaker contribution from its wholesale banking segment PBT of RM627m, which was down 23.7% from 3Q’s RM822m. The PBT of RM92m from Investment was also 25.4% lower. The total RM946m in PBT contributed by these two segments was down by 24% QoQ, partially due to the higher cost from the inclusion of RBS as well.

 The net impaired ratio was at a historical low of 0.7% with a 82.8% allowance coverage. The 20bps credit charge was below our target of 30bps.

 In addition to a vulnerable top line growth, the higher than expected cost of RM1,966m was lower by 2.0% QoQ, pressuring further the bottom line. During the quarter, the group recognised 100% of the RBS franchise earnings which came on board in the 4Q.

 The group meanwhile saw a full year cost-to-income ratio of 56% (slightly above ours of 52%).

 The achieved 16.0% ROE was within our expectations.

Outlook  During the briefing to analysts, management said the potential weaker IB deals in Malaysia in 1H13 due to the political headwinds despite it maintained mildly positive on the 1H13 outlook which is seen driven by consumer banking. Meanwhile, the group remained positive on its recent RBS acquisition, although the main earnings rise would only be kicking in from 2H13 in our view.

Change to Forecasts  We have cut our FY13E PAT estimate by 4.4% to RM4,610m for CIMB as we lowered our non-interest income estimate due to a likely weak 1H13 on slower IB deals due to the political headwinds.

Rating   Downgraded to MARKET PERFORM

 We are downgrading our rating on CIMB to a MARKET PERFORM due to its higher earnings uncertainty in 1H2013 and inline with lower earnings estimates as well as a lower targeted PBV multiple.

Valuation  We are lowering our target price to RM7.70, being at 1.9x the FY13 book value (from a TP of RM8.20 at 2.0x BV).

Risks  Tighter lending rules and a margin squeeze.

Source: Kenanga