Nov 14, 2009

CIMB Group Bhd

(Nov 11, RM13.02)
Outperform at RM12.82: Third-quarter (3Q) net profit of RM726.8 million (+9.6% quarter-on-quarter; +62.3% year-on-year) took nine-month net profit to RM2,003.9 million (+22.7% y-o-y) or accounted for 82.3% and 78.9% of our and consensus net profits respectively. This is due to sustained non-interest income (NIM), growing net interest income and profit from the sale of PT CIMB Sun Life.

3Q profit was a record with strong sequential improvement from both CIMB Niaga and the treasury and investment division. These were supported by stable q-o-q earnings from consumer bank as well as the asset management and insurance divisions. CIMB Thai turned around while contributions from its China associate almost doubled. The only setback was the corporate and investment banking division where earnings were impacted by provision for non-Asean loans.

Overall asset quality has improved slightly (albeit an increase in absolute gross non-performing loans) and if it excludes CIMB Thai, the improvement would have been more apparent. The strong earnings imply that CIMB is on track to meet the higher end of FY09 return on equity (ROE) key performance indicator (KPI) of 14% to 15%.


Forecasts for FY09-FY11 were raised by 9% to 10% to reflect more robust capital market prospects, higher net interest income and lower loan-loss provision (LLP). Consequently, FY09 ROE was raised from 13.8% to 15.1%.
Earnings volatility has declined with more stable and strong growth trajectory given traction from the consumer bank, a significantly lower trading book and excellent asset/liabilities management (protecting NIM against OPR cuts) as well as a very promising outlook for CIMB Niaga, which is already showing strong growth in the early stage of scaling up its regional platform.

CIMB’s fair value has been raised from RM13.50 to RM14.70 following the upward revision in our forecasts, based on unchanged 17 times CY2010 earnings per share (EPS).

With the record 3Q profit, the banking group reiterated that it is on track to meet its FY09 KPIs given that deal flow is strong in 4Q. Although loan growth (11.7% excluding Bank Lippo and CIMB Thai) is ahead of KPI (8%), it expects loan growth in 4Q to slow due to corporate repayments and the negative impact of the 5% real property gains tax (RPGT) and higher interest rate for mortgages. Deposit growth KPI is the only area where it has fallen behind with only 2.1% expansion (excluding Bank Lippo and CIMB Thai), well below the 18% target. However, if it includes the newly launched retail banking in Singapore, the difference would have been significantly lower.

Regional contributions are gaining traction, especially CIMB Niaga whose contributions grew substantially partly due to currency translation gains and sale of legacy bonds (at Bank Lippo). However, excluding the above two items, contributions still expanded despite additional allowances for receivable as well as commitments and contingencies. CIMB Thai has turned around in 3Q and coupled with profit from the sale of an office building, it is expected to contribute a small profit for FY09 rather than breaking even.

Although Singapore is still in the red and likely to remain so, its deposits and loans have grown tremendously since the launch of retail banking. The strategy in Singapore is different from other countries whereby its role is to complement the regional platform that the group is building. As for Bank of Yingkou, it is already contributing positively five months after completing the acquisition.

Future potential non-recurring profits would be part of capital management. These include the sale of an office building by CIMB Thai (to be recognised in 4Q09), sale and leaseback of CIMB Bank branches in 1Q10 and 20 million Sime Darby shares in FY10. All these will release capital and enhance ROE.

The group is expected to obtain approval for corporatising a bad bank that will initially house RM1 billion net legacy loans in 4Q. Post-corporatisation, CIMB Bank’s gross and net NPL ratios would improve significantly or almost halve from 5.2% and 2.2% to 2.8% and 1.3%. – RHB Research, Nov 11