CIMB Group Holding:Downgrade to Reduce,Too much has been priced in

Downgrade to Reduce from Hold. CIMB has outperformed (+49% YTD vs. 8% forthe KLCI) on hopes of a sharp credit cost driven earnings rebound. Although creditcost has improved, we believe that it is not enough to justify valuations at 14x 2018eEPS, which is close to its historical 15x PE average. We downgrade our rating toReduce from Hold due to the lack of positive earnings drivers. We raise our targetprice to MYR5.40 from MYR5.10 after rolling forward our BV base to Dec 2018e fromDec 2017e. All our other Gordon Growth Model assumptions remain unchanged.

    Our new target price implies 0.9x Dec 2018e BV and 11x 2018e EPS.

    No surprises in 2Q17. CIMB’s top line seems to have stabilized with total incomeand PPoP remaining stable at c.MYR4.3 bn and c.MYR2.1 bn per quarter in the pastthree quarters, respectively. Despite a stable PPoP, its PBT over this period hasbeen volatile due to credit cost. 2Q17 credit cost rose due to the absence of lumpywritebacks in 1Q17. This caused 2Q17 PBT to fall 11% q-o-q to MYR1,434m.

    Overall, the results were within expectations.

    Stable P&L drivers. Asset growth was soft with loans up 0.3% q-o-q in constantcurrency terms. Loans contracted in most geographies from lumpy corporate loanrepayments except in China and non-core countries, which makes up <4% of thebook. Total assets contracted 1% q-o-q. NIM stabilized at 2.71% in 2Q17. Gross NPLwas stable q-o-q at 3.21%. Despite being range-bound from 3.04%-3.42% sinceend-2013, gross NPL is still near an all-time low. It is very unlikely that this willimprove by much. Meanwhile, loan loss coverage has fallen to 78% from a recentpeak of 85% in 4Q15. Thailand, which makes up 9% of loans but 23% of group grossNPLs, saw its gross NPL ratio rise to 7.8% from 6.6% in 1Q17.

    Outlook ahead. CIMB did not sound too optimistic on 2H17 top-line prospects to us.

    The guidance is for a pickup in lending growth coupled with moderate NIM erosion.

    We would not be surprised if quarterly total income and PPoP remained stuck atc.MYR4.3bn and c.MYR2.1bn, respectively, in the next four to six quarters. Thismeans that bottom-line earnings growth will have to be driven by an improvement incredit cost, which at this stage remains uncertain. CIMB continues to guide for0.6%-0.65% credit cost in 2017e vs. 0.66% in 1H17 (HSBC: 0.65%).