Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: OSK
CIMB Group Holdings Bhd
(March 22, RM8.08)
Maintain buy at RM8.03 with target price RM9.77: The group's return on equity (ROE) has in the past been relatively volatile, hitting a peak of 20.2% in 2007 when CIMB registered record trading profits largely from its bond division, and plunging to 11.9% the following year due to significant mark-to-market losses from the same division. Although CIMB will continue to build on its market-leading domestic and regional investment banking franchise, we believe that the fast-growing regional consumer banking business and the associated transactional fee based income from the domestic and cross-border regional angle will be crucial to achieving a more sustainable and stable ROE growth. The group has set a five-year target of expanding its consumer banking contribution from 17% currently to 60%.
The growth of its more stable transactional fee income and forex-driven base income from CIMB Niaga has certainly provided more stability to the group's non-interest income base. For example, despite the group's record high investment banking and treasury income of RM1.8 billion in 2007, owing to a surge in treasury trading profits, its total non-interest income in that year was still 17% lower than the group's total non-interest income in 2010, when investment banking and treasury profits were 23% lower than the 2007 levels.
The group has managed to expand the more stable components of its non-interest income stream, which has helped to reduce its exposure to the more volatile investment banking and treasury trading income streams from 17% of its total income to just 12% over the past five years.
Despite the group having formulated a higher dividend payout ratio of 40% to 60%, we see further upside potential in its dividend payout as CIMB Bank remains well capitalised at 14.5% capital adequacy ratio and 15.4% risk-weighted capital ratio. This, coupled with the group's ability to expand the more stable components of its fee income business, provides a strong foundation to pave a sustainable and stable ROE growth path, which in our view provides the next longer-term re-rating catalyst for the stock.
The group's market-leading domestic debt capital market franchise is poised to be among the key beneficiaries of increasingly robust debt capital market fundraising in 2011/12, largely related to projects under the Economic Transformation Programme, the main one being the RM40 billion mass rapid transit (MRT) project. Although the fundraising will only be executed in stages, it will still provide a significant lift to the primary bond market as the RM40 billion MRT project, whose cost is now expected to escalate to over RM50 billion, is equivalent to the entire primary private bond market issuance in 2010.
The group's cost to income ratio remains among the highest among the domestic banks under our coverage, partially attributed to its regional expansion and investment banking element, which typically exhibits a higher cost structure. However, the group's ability to extract some form of cross-border cost synergy from its expanding regional operations, the enhanced efficiency arising from a more integrated IT system and, most importantly, its ability to successfully execute its core KPI of managing costs in 2011, should result in an improvement in the group's cost to income ratio in 2011.
We are maintaining our 'buy' recommendation and Gordon Growth-derived target price of RM9.77, underpinned by CIMB's sustainable ROE of 17.4% for FY11. The traction in overall deposit and current account, saving account growth momentum has surprised on the upside. Despite the higher base, the group has set even more aggressive loans and deposit growth targets for 2011 at 18% and 20% respectively. The key risks to our valuation are: (i) a sudden collapse in the capital market; (ii) a spike in loan loss provisions in Indonesia due to spiralling inflation and interest rate hikes; and (iii) a selldown of its high foreign shareholding, which currently stands at 41.7%. ' OSK Research, March 22
This article appeared in The Edge Financial Daily, March 23, 2011.
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: OSK
CIMB Group Holdings Bhd
(March 22, RM8.08)
Maintain buy at RM8.03 with target price RM9.77: The group's return on equity (ROE) has in the past been relatively volatile, hitting a peak of 20.2% in 2007 when CIMB registered record trading profits largely from its bond division, and plunging to 11.9% the following year due to significant mark-to-market losses from the same division. Although CIMB will continue to build on its market-leading domestic and regional investment banking franchise, we believe that the fast-growing regional consumer banking business and the associated transactional fee based income from the domestic and cross-border regional angle will be crucial to achieving a more sustainable and stable ROE growth. The group has set a five-year target of expanding its consumer banking contribution from 17% currently to 60%.
The growth of its more stable transactional fee income and forex-driven base income from CIMB Niaga has certainly provided more stability to the group's non-interest income base. For example, despite the group's record high investment banking and treasury income of RM1.8 billion in 2007, owing to a surge in treasury trading profits, its total non-interest income in that year was still 17% lower than the group's total non-interest income in 2010, when investment banking and treasury profits were 23% lower than the 2007 levels.
The group has managed to expand the more stable components of its non-interest income stream, which has helped to reduce its exposure to the more volatile investment banking and treasury trading income streams from 17% of its total income to just 12% over the past five years.
Despite the group having formulated a higher dividend payout ratio of 40% to 60%, we see further upside potential in its dividend payout as CIMB Bank remains well capitalised at 14.5% capital adequacy ratio and 15.4% risk-weighted capital ratio. This, coupled with the group's ability to expand the more stable components of its fee income business, provides a strong foundation to pave a sustainable and stable ROE growth path, which in our view provides the next longer-term re-rating catalyst for the stock.
The group's market-leading domestic debt capital market franchise is poised to be among the key beneficiaries of increasingly robust debt capital market fundraising in 2011/12, largely related to projects under the Economic Transformation Programme, the main one being the RM40 billion mass rapid transit (MRT) project. Although the fundraising will only be executed in stages, it will still provide a significant lift to the primary bond market as the RM40 billion MRT project, whose cost is now expected to escalate to over RM50 billion, is equivalent to the entire primary private bond market issuance in 2010.
The group's cost to income ratio remains among the highest among the domestic banks under our coverage, partially attributed to its regional expansion and investment banking element, which typically exhibits a higher cost structure. However, the group's ability to extract some form of cross-border cost synergy from its expanding regional operations, the enhanced efficiency arising from a more integrated IT system and, most importantly, its ability to successfully execute its core KPI of managing costs in 2011, should result in an improvement in the group's cost to income ratio in 2011.
We are maintaining our 'buy' recommendation and Gordon Growth-derived target price of RM9.77, underpinned by CIMB's sustainable ROE of 17.4% for FY11. The traction in overall deposit and current account, saving account growth momentum has surprised on the upside. Despite the higher base, the group has set even more aggressive loans and deposit growth targets for 2011 at 18% and 20% respectively. The key risks to our valuation are: (i) a sudden collapse in the capital market; (ii) a spike in loan loss provisions in Indonesia due to spiralling inflation and interest rate hikes; and (iii) a selldown of its high foreign shareholding, which currently stands at 41.7%. ' OSK Research, March 22
This article appeared in The Edge Financial Daily, March 23, 2011.
4th Q 2010 dividend for shareholder bila bayar
ReplyDelete