Analysts downgrade CIMB Group

PETALING JAYA: Analysts see cloudy days ahead for CIMB Group Holdings Bhd amid a challenging operating environment, with the downgrade of the banking group's rating calls.
Hong Leong Research said CIMB will be undertaking a "spring cleaning" in the fourth quarter of 2014, which suggests that FY14 results will be a washout.
CIMB will be taking a more aggressive stance in impairment test on loans to strengthen its asset quality, which will result in significantly higher provisions and would take its loan loss cover from 74% as at Sep 14 to more than 80%.
"Some of this spring cleaning would flow through to the first quarter of 2015 but the amount is expected to be lower than the fourth quarter of 2014. Thereafter, it will be very comfortable with asset quality and hence, the first quarter is expected to be the weakest quarter in 2015," it said.
RHB Research has downgraded CIMB from "neutral" to "sell", with a revised target price of RM5.20 after it lowered net profit by 6.5% to 7.5% for 2014 to 2016 as CIMB warned of higher loan provisioning and softer revenue growth expectations ahead.
"Even then, we think there is still downside risk to earnings, with markets-related income and asset quality as key risk areas," it said.
The CIMB management warned that the fourth quarter of 2014 is going to be a bad quarter due to higher loan provisioning for CIMB Niaga's coal portfolio as well as some provisioning for its domestic corporate book.
Valuation-wise, RHB Research said there is room for a further de-rating ahead for CIMB as it currently trades at price-to-book value of 1.23 times, implying a return on equity (ROE) of 11.3%, which is higher than the expectations of 10.5% to 11%.
Maybank Kim Eng Research expects the operating environment to remain subdued in 2015 on the back of weak capital markets and the tight liquidity situation in Indonesia.
"To this end, our current FY14 and FY15 forecasts are currently 6-7% below consensus and we remain cautious ahead of the group's 4Q14 results, which are targeted to be released before Feb 19," it said.
The research house has maintained a "hold" call on CIMB, with a target price of RM5.70.
Kenanga Research, meanwhile, has downgraded CIMB to "market perform", but with an unchanged target price of RM6.27 due to brewing operational headwinds and steep run-up in share price since the three-way mega bank merger was called off.
It expects CIMB's banking unit to see another lethargic year in 2015 as the capital markets are expected to slow down.
Hong Leong Research said as 2015 is expected to be another weak year for the capital markets, the focus will be on cost management amid less sanguine top line growth expectations to drive earnings.
CIMB's share price was down 22 sen or 3.75% to RM5.65 yesterday, with some 26 million shares traded.