By A. Stephanie
UOB KayHian today downgraded CIMB Group to “sell” with an unchanged target price of RM5.60, believing the recent share price rally has priced in return on equity (ROE) expectation of above 11% for 2015, and that this would only be achievable in 2016.
The research house’s 2015 ROE assumption currently stands at 10.6% versus the banking group’s internal assumption of 11%.
Its analyst noted that CIMB’s share price has rallied by 13% since the announcement of its Target 2018 (T18) turnaround plans in February.
UOB KayHian said, “While we note that the worst may be over in terms of provisions, its recent share price rally has reduced its reward-to-risk profile.
“CIMB’s overall earnings outlook continues to be dampened by elevated level of provisioning albeit a slight improvement from the high base effect in 2014, subdued capital market pipeline, moderating loans growth, and continued net interest margin slippage as liquidity conditions remain relatively tight, especially in Indonesia,” it noted.
One of T18’s targets for this year was to reduce the counting house’s Asia Pacific investment banking division’s operating cost by 30% in 2015, which the UOB KayHian believes CIMB is well on track to meet.
Despite this, the analysts said incremental uplift to ROE is relatively muted and estimated at four basis points (bp) as cost savings will only equate to roughly 3% of the group’s total operating cost.
It added that lingering concerns on the extended weakness in investment banking income flows will pose downside risk to CIMB’s cost-to-income ratio target.
A large portion of the T18 turnaround plans depend on challenging revenue drivers, it noted.
The research house remarked, “Of the 400bp targeted ROE uplift (raise ROE from 11% to 15% by 2018), nearly 40% has been earmarked from more challenging revenue growth drivers where execution risks are significantly higher.
“This would entail the deepening of CIMB’s SME business, accelerating its digital banking platform for greater customer analytics and the continued development of its transactional and cash management banking platforms across the region.”
On top of this, CIMB’s Indonesian prospects remain dim, the research house expecting overall loan and income growth to remain muted given CIMB Niaga’s relatively tight liquidity profile with a loan-to-deposit (LDR) ratio of 95.6%.
“Deposit growth continues to trail loans growth by a wide gap (2014 loans growth: 12.4% vs deposit growth 6.7%), in turn pushing up LDR from 90.3% to 95.6% over the past 12 months.
“CIMB’s 2014 loans growth of 12.4% was partially supported by lumpy working capital loans growth in 4Q14, while consumer loans growth remained lacklustre at just 4.4%,” it said.
UOB KayHian also expects the group’s loans growth to moderate to 9.6% this year from 11.4% last year, noting that Malaysian corporate and wholesale banking loans dragged 2014 performance.
The research house said, “In view of this, lower commodity prices in 2015 and an expected softening of both consumer and business sentiments post-goods and services tax (GST) implementation, we believe that growth headwinds will continue to linger on for 1H15.
“In terms of loans growth in key markets, we are expecting Malaysia to account for 7.5%, Indonesia at 11.0%, Thailand at 10.0%, and Singapore at 13%,” it said.
At 11.30am today, CIMB shares were trading at RM6.24, down 0.16% from its previous closing price of RM6.25.
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