Friday, August 5, 2011

CIMB Group Company Insight: Overweight: Small Group Meeting – 17% FY11 ROE Intact

5 August 2011
Price Target: RM9.58
Share price: RM8.40


Highlights
# FY11 ROE KPI of 17% is intact although loans and deposits growth KPIs are now low- to mid-teens (vs. original targets of 18% and 20% respectively), as 2H earnings are expected to perform better than 1H. 2Q already enjoyed improved capital markets and the pick-up is filtering through to 3Q.

# Dividend payout KPI of 40-60% also intact.

# Despite lower loans growth KPI and expectation of NIM compression (from intense competition), net interest income would still be on rising trajectory. NIM in Niaga has bottomed and is expected to improve.

# Cost rationalization (to reduce duplication in and inefficient processes) is gaining traction. Thus, CIR is expected to peak in 1H and improve in 2H. Overall, FY11 overheads and CIR are expected to be lower than FY10.

# Besides more active capital markets, both the interest rateand forex markets are also doing well. Although IPO pipeline is healthy, there is no large issue vis-à-vis last year.

# Credit charge for FY11 could be slightly higher than KPI of 40bps due to Collective Allowance which was affected by its high historical (legacy) Probability of Default and Loss Given Default as it has fully adopted FRS139 rather than the
transitional provision. As for Individual Allowance, there is no significant adverse impact or large problematic account(s).

# On Indonesia’s purported limitation in banks foreign ownership, it is still under deliberation and it is also uncertain whether there will be grandfathering.

# Trying to strengthen its share of trade flows via tie-up with Kotak Mahindra Bank of India as well as converting its China representative office to a branch.

Catalysts
Gaining more traction in SME and cost rationalization as well as better than expected non-interest income growth, potentially from Indonesia and Thailand as well as more active capital markets domestically.

Risks
Jump in impaired loans as well as lower than expected loan and non-interest income growth.

Forecasts
Unchanged.

Rating - BUY
Positives
Proxy to economic growth and active capital markets, robust prospects of Indonesia banking industry and growing regional universal bank platform.

Negatives
Non-interest income may fall short if capital markets soften.

Valuation
Target price maintained at RM9.58 (Gordon Growth with ROE of 18.4% and WACC of 9.7%).



Source: HLIB Research

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