OSK maintains buy on CIMB with higher target price

Tags: Brokers Call | CIMB Group Holdings Bhd | OSK Research

Written by Financial Daily
Wednesday, 23 September 2009 11:11

OSK Research has maintained its buy call on CIMB Group Holdings Bhd at RM11.26 with a higher target price of RM13 (previously RM12.30) as the banking group’s year-to-date (YTD) FY09 earnings trend was still indicative of strong earnings growth momentum.

The research house believed that a strong investment banking and bond origination deal pipeline; further traction in CIMB Niaga’s earnings growth, and more subdued loan loss provisioning on the back of improving asset quality will underpin earnings upgrades as it edges closer to the release of the group’s third-quarter (3Q09) results in November.

“Our current FY09 earnings estimates are 9.2% above consensus. Maintain buy with a higher target price of RM13 (2.2 times FY10 price-to-book value and 14.9 times FY10 price-earnings ratio), implying a realistic 14.4 times FY10 PER, which is still below its historical 15 times average PER,” it said.

CIMB was likely to be the lead beneficiary of a more functional and stable market environment, which would drive further improvement in capital market activities as corporates start to be more aggressive in seeking M&A opportunities, and equity and debt capital-raising exercises.

“We believe that there is significant upside bias to 2HFY09 non-interest income growth assumptions and potential as consensus expectation remains relatively subdued.

“The group’s 1HFY09 non-interest income grew by a relatively mild 7.6%, representing 36% of its total income base versus the recent peak of about 43% of total income in FY07,” it said.

As such, CIMB’s 2HFY09 non-interest income growth is likely to be stronger, underpinned by the more robust deal pipeline and mandates secured YTD, it said.

The research house said CIMB remained optimistic on the outlook of CIMB Niaga, adding that despite a lacklustre loan growth of 3.3% in 1HFY09, CIMB Niaga managed to report net interest income growth of 28% on surging non-interest margins (NIMs).

Following the recent completion of the integration process, CIMB Niaga is likely to display much stronger loans growth in 2H09, it added.

“Management has set an ambitious target of raising CIMB Niaga’s contribution to group PBT (profit before tax) to 42% by 2014, which we think may be achievable if the political stability and economic robustness in Indonesia is sustained over the next three to four years,” it said.

OSK Research was encouraged by CIMB’s regionalisation drive in enhancing cross-border value accretion both from a cost and revenue perspective.

Tangible results are already evident, as reflected in CIMB Niaga’s superior treasury income growth of late, with CIMB Niaga registering a 37% quarter-on-quarter (q-o-q) and 70% year-on-year growth in non-interest income, it said.

Cross-selling opportunities coupled with the centralisation of the group’s treasury platform to leverage on CIMB’s superior market-making treasury and investment banking franchise should spur more upside.

“Over the longer term, we believe that management’s efforts to grow CIMB into an established full-fledged market leading regional banking franchise would bring about a quantum leap in earnings via significant cross-border value enhancement.

“An entrenched regional presence and distribution network on top of its already established regional investment banking franchise should create multiple opportunities, especially with regard to enlarging its corporate and multinational customer base,” it said.

OSK Research also said CIMB’s domestic asset quality was still strong, noting that in 2Q09, total gross non-performing loans (NPL) ticked up by 2.2% q-o-q while net NPL ratio dipped to 2.4% from 2.5% in 1Q09.

On capital management, the research house said CIMB Bank is expected to have a core capital ratio (CCR) of 13% by end-FY09, which is significantly higher than the optimal level of 8% under normal operating conditions.

As risk aversion subsides and Bank Negara becomes more relaxed on capital requirements, there is certainly upside to capital management flexibility, which management itself has alluded, it said.

“The sale and lease-back of part of its branch network, which is expected to be completed by end-FY09, could unleash some proceeds that can be earmarked for capital management purposes.”

Last Friday, CIMB put on six sen to close at RM11.32.


This article appeared in The Edge Financial Daily, September 23, 2009.