Cost management: CIMB is a stock loved by investors for its liquidity, but they are also quick to punish it at the slightest hint of bearish sentiment.
PETALING JAYA: The earnings outlook for CIMB Group
Holdings Bhd this year looks bright underpinned by stronger capital market activities which will translate into stronger fee income growth for the group.
UOB Kay Hian Research on Thursday said it was raising its 2017 and 2018 earnings by 2.3% and 1.8% respectively on the back of stronger fee income growth expectations largely attributed to stronger capital market activities.
“We have imputed a 8% year-on-year (y-o-y) growth recovery in 2017 fee income versus the 4% contraction in 2016 on the back of expectations of stronger investment banking and brokerage income growth recovery off what we deemed to be a relatively low 2016 base effect.
“This helps to underpin our 6% overall non-interest income growth in 2017 versus 2% contraction in 2016. During the last General Elections held in 2013 (GE13), brokerage (+39% y-o-y) and underwriting fee income (+134% y-o-y) were the key drivers of overall CIMB group fee income growth (+13.6% y-o-y).
“Assuming that overall fee income growth for 2017 were to positively surprise on the upside (14% growth versus our 8% growth assumption), this could raise our 2017 earnings forecast by 2.3% and consequently return on equity (ROE) forecast form 9.2% to 9.5%,’’ the research house added.
Looking further ahead into 2018 and 2019, it expect ROE to gradually increase to 10.0% and 10.7% respectively. Still, this is significantly lower than the group’s initial T18 ROE target of 15.0% by 2018, the brokerage noted.
However, given the structurally higher provisioning trend upon the adoption of MFRS9 in 2018, UOB Kay Hian envisage a slight downside risk to its forecast of 10.0% ROE for 2018.
“We currently assume that net credit costs will decline further to 55 basis points (bps) in 2018 and 50 bps in 2019 as non performing loans (NPL) trends normalise downwards,’’ it said.
CIMB Group posted a stellar set of results last year, as net profit rose 4.5% to RM3.56bil on its highest-ever revenue of RM16.1bil. Its 3.5% growth in net profit to RM854.4mil for the fourth quarter from RM825.7mil previously also beat analysts’ average estimate of RM805mil, according to Thomson Reuters data.
On the regional front, the research house said Indonesia continues to experience some slippage within the consumer space as shown by the 200 bps q-o-q increase in CIMB Niaga’s consumer gross NPL ratio in Q4 16.
That said, it noted that expectations are that CIMB Niaga’s credit costs will continue to trend lower on a gradual basis from the current 263 bps to 150-200 bps by end-2017.
This should bring net credit cost for CIMB Niaga down to an average of 220 bps in 2017 versus 273 bps in 2016.
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