CIMB Group - Underpriced for regional non-interest income capability

-  We are maintaining our BUY rating on CIMB Group Holdings Bhd (CIMB), with a higher fair value of RM9.70/share (vs. RM8.70 previously). We have rolled forward our base year to FY13. Thus, our new fair value is now based on an ROE of 15.8% FY13F (vs. 15.7% FY12F) and an unchanged fair P/BV of 2.3x.

-  CIMB has reaffirmed its group common equity ratio of 8% as at end-June 2012, but its acquisitions of a 60% stake in the Philippines’ Bank of Commerce (BoC) and Royal Bank of Scotland (RBS) will shave off 35bps to 40bps. Thus, pro-forma group common equity ratio was at circa 7.6% as at end-June 2012. 

-  More importantly, CIMB has also confirmed that the computation of its group common equity ratio is already based on Bank Negara’s more conservative concept paper issued in May 2012.  It hinted that capital levels are likely to be more than adequate with the potential sale of CIMB Aviva. 

-  The non-interest income division remains wellsupported by the markets division, a stronger bond market in Indonesia, as well as a continuing robust domestic bond market. Its Indonesian subsidiary CIMB Niaga’s non-interest income has risen by more than fivefold since FY04, easily to more than RM1bil on an annualised basis and is now estimated to contribute 30% to group non-interest income for FY12F. 

-  From this, we estimate that the base gross interest income for the group is unlikely to drop to the pre-2005 level, say of RM1.5bil in FY04. Recall this was before CIMB’s full transformation into a universal bank. We would argue that the base case non-interest income should be at least RM2.5bil, given that CIMB Niaga is now likely to contribute a minimum of RM1bil in noninterest income p.a. 

-  A base non-interest income level of RM2.5bil implies a base ROE of 12.9% FY13F (vs. our current forecast of 15.8%), net earnings of RM3.8bil (vs. our current forecast of RM4.7bil) and a base fair value of RM6.80/share FY13F. 

-  At the current share price, this is pricing in a noninterest income level of RM3bil, which is not far off from our estimated base of RM2.5bil. We maintain BUY on CIMB. We expect the following re-rating catalysts for CIMB:- (a) sustainability in non-interest income; (b) better-than-expected asset quality; (c) sale of CIMB Aviva.  

Source: AmeSecurities