HDBSVR sees more excitement ahead for CIMB Group

KUALA LUMPUR: Hwang DBS Vickers Research (HDBSVR) sees more excitement in store for CIMB Group Holdings Bhd and raised its target price to RM17.

It said on Friday, April 30 that CIMB is its high conviction pick. Its higher TP is raised to RM17 after rolling forward its book value base to CY11, as it did for other Malaysian banks under our coverage.

"The TP implies 2.4x CY11 BV and is based on the Gordon Growth Model with the following assumptions: 17% sustainable ROE, 8% long term growth, and 11.2% cost of equity," it said.

HDBSVR sees stronger contribution from CIMB Niaga. CIMB Niaga’s 1Q10 net profit is 16% of its FY10F profit for CIMB Group.

Key positives were net interest income, which grew 8% quarter-on-quarter (Q-o-Q) as NIM expanded 18 bps to 6.78% (due to lower funding costs) and provisions fell 58% Q-o-Q on lower charge-off rates of 0.29% (vs 0.71% in 4Q09).

Key drag to earnings were lower non-interest income (-43% Q-o-Q) and higher operating expenses (+8% Q-o-Q). Notably, deposits grew 9% Q-o-Q, stronger than for Bank Danamon and Bank Mandiri. Loans grew 1% Q-o-Q and 14% Y-o-Y. CASA to total deposits rose to 48% from 46% in 4Q09. Assets quality was stable with gross NPL ratio at 3.1%.

CIMB is the key beneficiary of recovering capital market as the Securities Commission approved 10 IPOs in 1Q2010.

The potential sell-down of stakes in government-linked companies to increase free floats (e.g. Khazanah’s 32% stake in Pos Malaysia) and potential listing/privatisation of two sizable Petronas units, Percetakan Nasional Malaysia Berhad, CTRM Aero Composites Sdn Bhd, Nine Bio Sdn Bhd and Innobio Sdn Bhd will beef up M&A activities.

"We expect a large supply of new government-related debt issues (MGS) and possibly debt-raising by government-linked entities. We believe CIMB Group will be a key beneficiary of the listings, advisory and transactions, which should boost its non-interest income," it said.