CIMB Group faces challenges in tough economic environment
CIMB could reportedly face a tough and uncertain economic environment as it tries to meet some of its key-performance indicator targets this year. Generally, analysts expect CIMB Group's asset quality in Malaysia to remain stable, however, suggestions are that the group's operations in Thailand and Indonesia will remain weak, pulled down by still-high provisions for bad loans. CIMB has said that provisions for CIMB Niaga in 2Q would remain elevated but be lower than the preceding quarter. UBS downgraded its earnings estimates for CIMB on account of this announcement.
KUALA LUMPUR (July 23): UBS Securities Malaysia Sdn Bhd downgraded its earnings estimates for CIMB Group Holdings Bhd by up to 6%, in anticipation of reduced net interest margins (NIMs) and after taking into account its RM650 million restructuring cost.

In a note, UBS analyst Chris Oh said the earnings downgrade came with a lower target price for CIMB (fundamental: 1.05; valuation: 2.25) shares at RM5.80 versus RM6.30 previously.

"NIMs are likely to compress closer to 20bps for 2015 (fromthe 10bps previously guided), as funding competition impacts the domestic business (albeit with less pressure than in Q115), while Indonesia sees further compression from a changing loan mix and lower LD (loan-deposit) ratios.

“Earnings estimates could be down by 3%/6% for FY 2015/16. [The] 12m price target have also been reduced from RM6.30 to RM5.80, assuming average 2015-19E ROE of 11.8% (12.2% previously), cost of equity of 10.7% and a long-term growth rate of 6%,” Oh said.

According to UBS' report, CIMB is expected to register restructuring cost of around RM650 million, after terminating the employment of about 3,600 workers in Malaysia and Indonesia.

CIMB's employee downsizing came under its mutual separation scheme (MSS), which was completed on July 1 this year.

"The MSS has resulted in a restructuring cost of about RM450m (apportioned over Q215 and Q315 earnings), after take-up by about 3,600 of its staff or 11% of its pre-MSS workforce in Malaysia and Indonesia.

"Including the restructuring of the investment bank in Q115, total restructuring costs of around RM650m would be taken in 2015, with the RM500m per annum cost savings to occur from 2016 onwards, and thereafter, projected cost inflation of around 2% per annum till 2018," the analyst said.

Today, CIMB shares fell four sen or 0.7% at 12:30pm to settle at RM5.51, for a market capitalisation of RM46.78 billion.