CIMB shares take a beating

by **Cals** Thu 16 Jan 2014, 17:32

Business & Markets 2014

Written by Shalini Kumar of theedgemalaysia.com

Thursday, 16 January 2014 10:02

KUALA LUMPUR: CIMB Group Holdings Bhd’s shares took a beating yesterday after it announced a RM3.5 billion capital raising exercise on Monday. Profit-taking activities on the local bourse dampened sentiment, affecting many index-linked counters including CIMB Group.

At the close of trading yesterday, CIMB shares were down 21 sen or 2.88%, with 20.32 million shares done — making the banking group Bursa Malaysia’s 11th biggest decliner. The intraday low was RM6.95.

In early trading yesterday, the stock dropped nearly 5% before recovering in the afternoon, trading slightly above the issue price of RM7.10.

CIMB had announced the RM3.55 billion capital raising exercise via a private placement of 500 million new shares, or 6.08% of its enlarged share capital, at RM7.10 apiece. The rationale was to reposition its capital for growth, following a sharp depreciation in the Indonesian rupiah.

The new issue lifts CIMB Group’s common equity tier 1 (CET1) as at Sept 30, 2013 from 8.2% to approximately 9.7%. The new equity was placed to domestic and foreign investors over the course of the working day last Monday. The offer was well oversubscribed and enabled CIMB Group to increase the deal size by 25% from 400 million to 500 million shares.

Analysts had mixed reactions to CIMB Group’s share placement, due to the dilutive effect the exercise will have on the group’s equity and earnings despite boosting capital ratios.

KAF Investment Research estimates that the placement will have a dilutive impact of up to 100 basis points on CIMB Group’s return on equity (ROE).

“The core equity ratio of the CIMB Group was 7.64% and tier-1 capital adequacy ratio (CAR) was 9.16%, relatively low amongst Malaysian banks and probably explain the rationale for raising extra capital,” said KAF in a note yesterday.

“Assuming a 4.5% yield on the funds raised, we estimate there is a 3% earnings per share (EPS) dilution from the private placement. The impact on ROE is larger at about a 100 basis points reduction,” it added.

The private placement will raise core equity and tier-1 CAR by approximately 200 basis points each, thus providing an adequate buffer even under the Basel III framework.

KAF is maintaining its “buy” call on CIMB Group, but has cut its target price to RM8.40 from RM9.10 previously. The research house said the knee-jerk selling after the placement would be a good buying opportunity for investors.

UOB KayHian Research believes CIMB is highly likely to miss its internal target of achieving a group common equity tier-1 (CET1) of 9.5% by 2015, dragged by slower growth in its Indonesian operation.

It projects a negative dilution impact on 2014F EPS of 6% and expects 2014F ROE to possibly moderate from the estimate of 15.1% to 14.1%.

“Given the intensifying growth headwinds in Indonesia, and hence potential earnings downgrades coupled with the dilution effect from the recent capital-raising exercise, we believe that sentiment on the stock is likely to remain poor,” the research house said in a note.

“The capital-raising exercise may have come as a slight surprise to the market given the fact that the company alluded that it viewed its 8.2% group CET1 ratio as optimal. It had sufficient time to build additional capital buffers in light of its dividend reinvestment plan, and full implementation of Basel III would only kick in by 2019.”

UOB KayHian is maintaining its “hold” position on CIMB Group and lowering its target price to RM7.51 from RM7.80, after incorporating the dilution.

This article first appeared in The Edge Financial Daily, on January 16, 2014.