AmWatch - CIMB Group : Cost-driven earnings HOLD, 9 Jun 2015

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CIMB Group : Cost-driven earnings          HOLD

We maintain our HOLD rating on CIMB Group Holdings (CIMB), with a lower fair value of RM 5.40/share (from RM6.30/share previously). This is based on a normalised (excluding one-off costs) lower FY15F ROE of 10.4% (from 11.2%) and a lower fair P/BV of 1.2x (from 1.3x).

The press reported recently that CIMB’s targeted cost savings from its recent mutual separation scheme (MSS) is RM400mil per annum, assuming 4,000 employees take up the offer. This is in line with the group’s earlier articulated cost savings target of RM400mil to RM600mil per annum. Recall the group had already announced a restructuring cost of RM202mil. This came from one-off rationalisation costs of its investment banking operations. In terms of impact to FY16F, assuming that the latest MSS will yield about RM200mil in cost savings per annum, or half that of the targeted RM400mil, we estimate normalised ROE in FY16F to be 10.9%. FY16F’s fair value then is estimated at RM6.30/share, based on a fair P/BV of 1.3x.

As for the immediate FY15F’s net earnings, we have adjusted our net earnings forecasts for FY15F to take into account one-off restructuring costs, and a higher NIM compression of 20bps (from -8bps previously) YoY for FY15F , in line with the company’s new guidance. In terms of one-off restructuring costs, our total assumption is now RM452mil for FY15F. This assumes one-off MSS costs of RM250mil (which is expected to lead to cost savings per annum of RM200mil in FY16F, assuming average payout of 1.25 months for every year of service), and adding to that, the RM202mil rationalisation cost for its investment bank division which was announced in the 1Q results.  Our net earnings forecast is now downgraded by 22.7% for FY15F, to RM3.4bil from RM4.6bil previously. 

We believe CIMB’s share price has been reacting to news flow on the MSS costs savings in recent times. Looking ahead, we expect the share price to continue to be driven by MSS news flow, given that the main boost to net earnings next year is from its cost savings, while revenue and credit costs drivers remain uncertain.

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