CIMB Group Holdings - Indo Could Be Dangerous

The Week That Was in ASEAN@Smartkarma - Indonesia Cement, Thailand's Recovery, and SG REITs

Global Senior Analyst, Fundamental Equity Research

Emile Farsoun

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/cimb-group-holdings-bhd" target="_blank" data-smartkarma-citation="entities:68:1" rel="noopener">Cimb Group Holdings (CIMB MK)</a> is the second largest Malaysian bank, which is trading at low valuation multiples (forward P/E of 9.6x, and P/B of 0.9x). The valuation appears full given the bank's low ROE of 9.7%. Moreover, the bank's capital ratio is just above its target at 12.9%, raising the concern that CIMB will need to build a capital cushion.In our view, the bank lacks catalysts to drive the ROE materially above 10%. We consider three potential catalysts for CIMB, which lead us to this conclusion; first, the bank's NIMs are unlikely to expand given the increased competition for CASA funds. Second, the cost structure is high with C/I around 53% due to the Forward23 program, which is unlikely to decrease over the next 12 months. Third, fee income is unlikely to recover and the recent stagnation would continue due to weak capital markets.The overall macro environment is subdued with 2019 GDP growth expected of 4.8%. Lending growth is modest, with credit quality at a trough, and at risk of worsening. In effect, the economy is unlikely to act as a tailwind, as the easing cycle is expected to pressure NIMs going forward.In conclusion, despite an undemanding valuation, we believe the lack of catalysts would limit ROE expansion and hence a re-rating in the stock.

Cimb Group Holdings (CIMB MK) is the second largest Malaysian bank, which is trading at low valuation multiples (forward P/E of 9.6x, and P/B of 0.9x). The valuation appears full given the bank's low ROE of 9.7%. Moreover, the bank's capital ratio is just above its target at 12.9%, raising the concern that CIMB will need to build a capital cushion.In our view, the bank lacks catalysts to drive the ROE materially above 10%. We consider three potential catalysts for CIMB, which lead us to this conclusion; first, the bank's NIMs are unlikely to expand given the increased competition for CASA funds. Second, the cost structure is high with C/I around 53% due to the Forward23 program, which is unlikely to decrease over the next 12 months. Third, fee income is unlikely to recover and the recent stagnation would continue due to weak capital markets.The overall macro environment is subdued with 2019 GDP growth expected of 4.8%. Lending growth is modest, with credit quality at a trough, and at risk of worsening. In effect, the economy is unlikely to act as a tailwind, as the easing cycle is expected to pressure NIMs going forward.In conclusion, despite an undemanding valuation, we believe the lack of catalysts would limit ROE expansion and hence a re-rating in the stock.

CIMBグループ（CIMB MK）：触媒不足で傍観者のまま