Subdued operating environment for CIMB locally & abroad

PETALING JAYA: Maybank IB Research has maintained its "hold" call and target price of RM5.60 on CIMB Group Holdings Bhd on the back of a subdued operating environment both domestically and regionally.
"Domestically, what is positive is that net interest margins (NIM) are likely to stabilise into 2H15 while asset quality remains strong. Conversely, loan growth is moderating, while the capital markets are still soft," it said in its research note yesterday, after a meeting with the bank's management on Tuesday.
Liquidity positions in Indonesia have improved while its problematic loans have not shifted much away from those already identified in the commodity sector.
"The greatest challenge, however, is in managing provision levels, which are expected to remain elevated in 2Q15 before tapering off marginally in 2H15. CIMB Thai, meanwhile, continues to perform well operationally but earnings continue to be suppressed by high provision levels which may persist for another quarter or two," it said.
CIMB's cost-cutting move will result in savings of RM500 million to RM600 million per year filtering through in full from FY16. Maybank IB's forecasts factors in savings of RM300 million in FY16 and RM500 million in FY17.
However, it sees little reason to change its view on the stock, especially since near-term outlook is still clouded by ongoing provisioning concerns both in Thailand and Indonesia.
CIMB Thai continues to record top line growth with operating income up 18% year-on-year in 1H15. Costs have been well controlled, contributing to operating profit growth of 53% year-on-year.
"The deterioration in asset quality alongside subdued economic growth has been the problem, with the bank's gross non performing loan (NPL) ratio rising to 3.9% end-June 2015 from 3.3% end-December 2014, arising principally from commodity-related corporates and the auto loan book.
"Provisions, therefore, have been rising, resulting in a 44% year-on-year decline in 1H15 net profit. It could take two to three more quarters for provisions to normalise," it said.
Although loan growth to date has held up fairly well, Maybank IB said there is anecdotal evidence of a slowdown into 2H15, especially on the domestic consumer front while the corporate segment has yet to see a substantial pick-up in loan demand.
"All in, however, we feel that management's earlier guidance for a 10% loan growth in FY15 does still seem relatively achievable and we maintain our forecast of 11% growth for now," it said.
Commenting on the bank's plans to grow the SME segment, it said that systems are in place to offer facilities such as trade finance, forex and cash management but it will take time for the bank to penetrate this segment more meaningfully.
MIDF Research maintained its "neutral" rating and target price of RM6.10 on CIMB Group due to "unexciting top line growth" expected for FY15.
It expects the bank to remain focused on managing costs to improve earnings in the near term, before moving on to achieve higher revenue.
Hong Leong Investment Bank Research maintained its "hold" call and target price of RM6.02, as FY15 is expected to be "another washout year" with prospects for FY16 and beyond being more pertinent.