CIMB stands to gain from tie-up

  • Banking
  • Thursday, 08 Jun 2017

Operating income was lower by 1.6% while improved cost controls brought about a 2% decline in operating expenses.

PETALING JAYA: CIMB Group Holdings Bhd’s tie-up with China Galaxy Securities Co Ltd (CGS) in the stockbroking business is expected to benefit the Malaysian banking group in terms of cost savings and opportunities to expand further into China.

However, analysts say, the benefits from the partnership will only be evident for CIMB in the group’s financial year ending Dec 31, 2018.

According to MIDF Research, the positive impact will not be immediate and will be felt only by next year as the deal takes time to clear various jurisdictional issues.

“Previously, the management estimated that there is a potential uplift of 100 basis points (bps) to cost-to-income ratio (CIR). We believe that the impact will only be felt in 2018 given the time it will take to clear the various jurisdictional issues,” the brokerage explained in its report.

CIMB on Tuesday formalised a deal to dispose of a 50% equity in CIMB Securities International Pte Ltd (CSI) to CGS for S$167mil (RM515mil). The purchase consideration was valued at 1.3 times on CSI’s book value of S$256.9mil as at Dec 31, 2015.

The deal would see CIMB and CGS becoming 50:50 shareholders in CSI to operate the ex-Malaysia stockbroking business in India, Indonesia, Singapore, Thailand, Hong Kong, South Korea, India, the UK and the US.

CIMB’s shares fell three sen to close at RM6.71.

According to AffinHwangDBS Research, CIMB could book a potential gain of RM180mil from the deal with CGS. In addition, the brokerage notes, CIMB could see doors open to more capital market deals and its customer service level enhanced as it benefits from the tie-up with the China-based company.

“The CIMB group will also see a benefit of 100-150bps in cost-to-income ratio (from our forecast of 51% for 2017 to 2019), as revenues and costs from CSI will be deconsolidated,” AffinHwangDBS Research said.

The brokerage raised its target price for CIMB to RM7.50 from RM7 previously, while maintaining its “buy” call on the counter.

Similarly, Hong Leong Investment Bank (HLIB) also raised its target price for CIMB to RM6.30 from RM5.93 previously, while maintaining its “hold” recommendation on the counter.

HLIB said it was positive on CIMB’s divestment of its stockbroking stake to CGI as the deal would enable CIMB to achieve further saving in its overhead expenses.

It projected CIMB’s cost-to-income ratio to improve around 100-150bps, or RM300mil-RM350mil from 2018 onwards based on cost of run-rate of RM600mil-RM700mil. On top of that, HLIB projected CIMB to see modest additional earnings contribution of RM10mil-RM15mil from next year onwards.

“Post-acquisition, CIMB will focus its efforts in investment banking, capital market products and services while the China Galaxy JV will be positioned as a pure-play stockbroker with universal bank client base,” HLIB noted in its report.

Meanwhile, MIDF Research regarded CGS as a “solid partner” for CIMB.

“We believe it is a win-win move for both parties as it will give an opportunity for the group to have a toehold in the Chinese market, including facilitating clients doing business in China, especially with the acceleration of the Chinese led ‘One Belt One Road’ initiatives. These include capitalising on China-outbound mergers and acquisitions, China-Asean cross-border investments and infrastructure funding,” MIDF Research said of the potential benefits for CIMB.

CGS, on the other hand, could benefit from CIMB’s presence in Asean, it added.

MIDF Research downgraded its recommendation on CIMB to “neutral” from “buy” previously due to the recent run-up of the counter’s share price. Its target price for CIMB remained unchanged at RM7.10.

AmInvestment Bank also downgraded its call on CIMB to “neutral” from “buy” for the same reason, with unchanged target price of RM6.70.

The investment bank was also positive on CIMB and CGS tie-up, saying: “Through this collaboration, CIMB will be able to capitalise on the strong network and business and technological know-how of CGS.”

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Business , CIMB , stockbroking , China Galaxy


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