Thursday, September 8, 2011

HDBSVR lowers CIMB Group target price to RM7.40

KUALA LUMPUR: Hwang DBS Vickers Research has downgraded CIMB Group Holdings Bhd to a Hold and lowered the target price to RM7.40.

It said on Thursday, Sept 8 its revised target price implied 2.2 times CY12 book value based on 16.5% returns on equity, 6.5% growth and 11% cost of equity.

'CIMB's high 38% foreign shareholding (ex-MUFJ's strategic stake) poses risks of a selldown in times of deleveraging. Also, Indonesia policy risk is priced in at current valuations, although if implemented, the loss of 50% of its Indonesian contribution could reduce earnings by another 10%-13%,' it said.

HDBSVR said CIMB Group's FY11 earnings were likely intact although management seemed to err on the side of caution.

'But 2012 could see a repeat of 2008 if capital markets turn soft. In 2008, when capital markets were sluggish, CIMB's non-interest income tumbled 38% on-year. 'Our 2012 forecast is not bearish as we imputed only 13% drop in non-interest income to lead to 9% earnings contraction for the year,' it said.

The research house said in volatile times, market-related revenues would be most at risk.

'We estimate 40% of CIMB's non-interest income is market-related, mainly to capital market flows. Even mandates in the bag do not guarantee deals will 'go to the market'. This prompted us to trim non-interest income by 28-34% over FY12-13F.

'We also reduced loan growth assumptions to 12% from 17%, and trimmed NIM to 2.6%/2.5% from 2.7%/2.6%, over the same period, given persistent competition and a less aggressive loan growth agenda for Niaga. These led to 23-27% earnings cut. Key risk to our call is a quicker-than-expected rebound of capital market flows,' it said.

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