Drop in CIMB’s shares due to profit taking — MIDF

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KUCHING: MIDF Amanah Investment Bank Bhd (MIDF Research) believed the sharp drop in CIMB Group Holdings Bhd’s (CIMB) share prices of late was due to profit taking activities, believing the bank still retains its strong fundamentals.

This came as the share price of the group fell sharply by 3.29 per cent last Friday. In fact, MIDF Research saqw that it had been on a downtrend since April 30, 2018, retreating by 6.6 per cent within the period.

“We believe that the share price retracement could be due to profit taking activities,” it said yesterday in a note, adding its belief that CIMB’s fundamental and forward earnings potential remained intact.

“In our opinion, the share price retracement presents an excellent opportunity to accumulate on the stock. This is due to the fact that we believe that the fundamentals of the group are still intact with solid earnings potential for FY18 and FY19.

“In addition, we opine that there is an investment case in the medium term as well.”

It believed CIMB’s loans growth would be better, while its net interest margin (NIM) compression was expected to be benign.

To recall in FY17, the group gross loans growth grew only at 0.2 per cent year on year (y-o-y) due to its overseas market.

“Hence, even with minor recoveries, it will translate to more solid loans growth,” MIDF Research added. “For FY18, we are expecting a group gross loans growth of six per cent y-o-y.

“In addition, we expect NIM compression to be benign with at most -2bps from last year level. Both of these will drive FY18 top line growth.”

With respect to costs, MIDF Research anticipated this to be well maintained with cost-to-income ratio at circa the 50 to 52 per cent level.

“While there may be some further cost consolidation, this will be mitigate by the investments needed to be made for its digital offerings, which will be funded the one-off gains from the divestments.

“We expect that asset quality will continue to improve in FY18. This is especially with improvements made in Indonesia and Thailand. For example, gross non performing loans fell 24 basis points (bps) quarter on quarter (q-o-q) and by 40bps y-o-y to 3.51 per cent in Indonesia as at 1QFY18.

“Based on the 1QFY18 results that have been announced for Thailand and Indonesia, we could expect that the group’s overseas to contribute more and provide a boost for the Group’s earnings.

“In fact, we understand that managementis developing a strategic direction beyond the T18 initiatives with the expectation for its overseas operation to contribute more and be earnings accretive to the group.”

Besides the short term, MIDF Research believed that CIMB has a strong investment case in medium term as it looks beyond the T18 initiatives. One area for growth is the prospect of the Group growing its digital banking footprint which the research firm believed held the highest potential.

“This will be done for customer acquisition and retention, via its distribution channels such as internet and mobile,” it said. Digital banking will also give an avenue for the group to explore and take advantage of data analytics.

“Besides top line opportunities, digital banking will also have a positive impact on costs-to-income ratio once implemented.

“With the Group’s earnings potential expected to be remain solid in FY18 and FY19, it is an opportune time to take advantage of the share price retracement.

“We believe that the timing is particularly important given the potential relief rally after the 14th General Election as per the view of our strategist. Hence, we reiterate our buy call at an unchanged target price of RM7.80.”