Limited re-rating catalyst for CIMB Group in near term: MIDF

PETALING JAYA: MIDF Research foresees CIMB Group Holdings Bhd's FY2015 earnings' continue to be adversely impacted by its Thai and Indonesian operations and sluggish investment banking (IB) business.
"We see limited re-rating catalyst in the near term. Earnings of the group for FY15 will continue to be impacted by the higher provisioning for loan losses at PT Bank CIMB Niaga, slow IB business momentum with unexciting equity capital market and further net interest margin (NIM) compression due to Niaga and CIMB Thai Bank PCL's focus on high quality credits," the firm said.
Meanwhile, analyst Kelvin Ong said, restructuring charges of CIMB's Malaysian and Indonesian operations for cost benefits in the longer term will be a dampener to the group earnings in FY15.
"Hence, we maintain our target price of RM6.20, pegging the stock to 1.3 times price to book multiple on FY15 book value of equity per share (BVPS) and keep our neutral recommendation," MIDF analyst Kelvin Ong said in a note yesterday.
Last Friday, CIMB Group announced a Mutual Separation Scheme (MSS) for its employees in Malaysia and Singapore.
CIMB Group unveiled its new Target 2018 (T18) initiatives earlier this year aimed largely at driving its cost-to-income (CI) ratio down to less than 50% by 2018.
To achieve greater cost and operating efficiency and lower its CI ratio to 50%, the banking group said it will scale down its operations in certain geographies and business segments, de-layer and right size across the organisation and improve work processes.
It also plans to drive its total income up by expanding in the areas of digital consumer banking, SME and transaction banking.The MSS exercise follows a scale back and rightsizing of its equity business and IB platform.
"In our earlier update note, we highlighted that the group will incur restructuring expenses in FY15. Expenses from this programme from any take-up of the MSS by its employees in Malaysia and Indonesia will be part of the said restructuring charges," Ong said.
He said that the programme follows the announcement of the closure of CIMB Group's Australian IB office, which has impacted 100 employees on Feb 10, 2015 as well as the release of 50 employees of selected Asia and Pacific (APAC) markets to reduce its IB cost base by 30% for FY15.
"We understand from the last meeting with the management that 70-80% of intended reduction in IB cost has been completed," Ong said.
He added that initiatives to achieve 30% cost savings on equities and IB cost base, are expected to the fully completed by second quarter FY15.
The IB business reported the highest in cost base with a CI ratio of 100.6% among CIMB Group's business segments in FY2014.
Ong said, although CIMB Group's IB's operating expenditure will be lower with its exit from Australia market and streamlining of IB business, the benefits will be offset by restructuring charges in FY15.
Ong said the initiatives by CIMB is likely to contribute to an RM400 million-RM600 million improvement in cost base in FY16 as compared with FY14.
"In view of the challenging operating environment for banks in particularly on the top line growth, reduction in cost base is expected to have a much speedier impact than strategic focus on growing revenue to lift earnings. We believe that the group will remain focused on initiatives to lower its cost first before moving on to grow its revenue with its identified strategies under T18," he concluded.