CIMB Group Holdings Bhd
(Nov 25, RM5.34)
Maintain buy with an unchanged fair value (FV) of RM6: CIMB Group Holdings Bhd reported a lower core net profit of RM1.25 billion (-2.1% quarter-on-quarter) for the third quarter ended Sept 30 of financial year 2019 (3QFY19) after excluding a gain of RM114 million from the group’s disposal of loans, including CIMB Niaga’s sale of non-performing loans of about RM100 million, and adjusting for RM349 million of transformation expenses.

The transformation cost of RM349 million included mutual separation scheme (MSS) expenses for 1,100 employees of CIMB Niaga and 1,000 Malaysian employees who had opted to take up the FlexMyCareer scheme to exit the group; 2,100 employees will be leaving in three to six months’ time. Cost savings would be RM200 million per annum from this exercise, requiring 18 months to break even. Part of the savings would be reinvested in the Forward23 strategy.

Core earnings grew 8.8% year-on-year (y-o-y) to RM3.67 billion for the cumulative nine months of FY19 (9MFY19). The 9MFY19 net profit was within expectations, making up 77.6% of our and 75.8% of consensus estimates. The group delivered a return on equity (ROE) of 9.1% for 9MFY19, based on core earnings that were in line with our estimates.

The group’s gross loan growth moderated to 5.6% y-o-y (2QFY19: 6.9% y-o-y) with slower loan growth in Malaysia impacted by corporate repayments. Excluding foreign exchange impact, loans grew 3.9% y-o-y.

CIMB’s net interest margin has slipped by three basis points (bps) year to date to 2.47% mainly due to the overnight policy rate cut of 25bps in May as well as the Malaysian Financial Reporting Standards 9 (MFRS 9) adjustment to the effective interest rate for consumer banking, while its margin in Indonesia was impacted by the three rate cuts recently and higher deposit competition.

Operating expenditure (opex) in 9MFY19 rose 15.6% y-o-y due to investments and expenses of the Forward23 strategy (+10.1% y-o-y, excluding the MSS in Indonesia and FlexMyCareer expenses in Malaysia of RM349 million). Opex on a business-as-usual basis grew by 4.9% y-o-y. The cost-to-income ratio based on core total income for 9MFY19 was 54.6% higher than our expectation of 53%.

CIMB’s 9MFY19 credit cost improved to 0.38% (9MFY18: 0.45%). Excluding MFRS 9 enhancements in 3QFY19, its 9MFY19 credit cost was 0.51%. The group’s overall gross impaired loan ratio increased slightly to 3.15%, contributed by higher impairment loans to households, the wholesale and retail trade, restaurants and hotels.

We reiterate our “buy” call on CIMB with an unchanged FV of RM6 based on a forecast FY20 ROE of 9.1%, leading to a price-to-book value ratio of one times. We tweak our FY20 net profit forecast slightly lower by 1.6% after adjusting our net interest income and opex estimates. — AmInvestment Bank, Nov 25