CIMB Group Holdings Bhd - CIMB Thai: Still in Transition

Date: 16/01/2019

Source  :  KENANGA
Stock  :  CIMB       Price Target  :  6.05      |      Price Call  :  BUY
        Last Price  :  5.26      |      Upside/Downside  :  +0.79 (15.02%)

Although lending activities improved, CIMB Thai’s 12M18 earnings were dragged by dismal 4Q earnings and higher opex. On a positive note, asset quality improved, as expected, despite uptick in credit charge in Q4. As the bank historically contributed <5% to the Group’s earnings, we made no revision to our overall forecast for the Group. TP of RM6.05 is also maintained with OUTPERFORM call reiterated on account of undemanding valuations.

Fall in 4Q earnings dragged overall growth. 12M18 CNP was a disappointment (-98% YoY to THB6.9m) dragged primarily by: (i) falling earnings in 4Q18, and (ii) higher opex (+9.6% YoY) mainly from higher personnel costs in line with the bank’s transitional expenses. Top-line was soft due to falling NOII (-8.1% YoY) but mitigated by improvement in NII (+5.3% YoY). Improvement in NII was supported by higher loans (+7.6% YoY vs. 12M17: +3.1% YoY) but mitigated by falling NIMs (- 64bps to 4.1%) due to competitive lending rates. Credit charge improved by 14bps to 2.2% in tandem with improvement in asset quality with GIL down by 20bps to 4.3%.

On a quarter basis, earnings dragged by higher impairments and opex. 4Q CNP registered a net loss of THB530m dragged by higher opex (+8.5%) and impairment allowances (+70.6%) despite top-line improving by 4.1% to THB3.31b. Historically, in the last 3 years, CNP had been in the negative territory due to higher opex in the fourth quarter. Loans moderated at +3.1% but historically loans were also soft in Q4. Asset quality improved as GIL fell 140bps to 4.3% but credit charge saw a 120bps surge to 2.9% due to guidelines from BOT in preparation of IFRS9 in 2020.

Moving forward, for FY19E, we expect uptick in credit charge due to the new guidelines from the BOT. Loans will likely moderate driven by consumer demand (as interest rates are still accommodative despite the 25bps hike to 1.75% in Dec 2018) as we expect exports to moderate. We also expect downside pressure on NIM due to competitive lending ahead. However, we expect improved FY19E earnings ahead at THB390m based on these assumptions; (i) loans growth of <6%, (ii) NIM at <4.0%, (iii) credit costs at 250bps, (iv) CIR at 57%, and (v) tax rate at <22%.

No changes to our forecasts for the Group, as historically CIMB Thai’s contribution to the Group is minimal (at <5%). FY17 PBT contribution was at 3% and we expect contribution for FY18 to be <2%.

Earnings maintained. For now, pending the Group’s 12M18 results expected at the end of next month, our forecast earnings are maintained for now. We have previously revised FY18E earning by 4% to RM4.8b based on assumptions as follow: (i) loans growth of ~5.5%, (ii) NIM compression at 10bps, and (iii) credit charge of 50bps.

TP maintained at RM6.05 based on an unchanged PB/PE of 1.0x/12.0x with the PB 0.5SD-level below its 5-year mean to reflect the on-going challenges ahead for the Group; challenging loans, uptick in credit charge and downside pressure on NIMs. Reiterate

OUTPERFORM as we feel our FY18E earnings are fair and conservative enough, justifying our TP, giving a potential return of >10%.

Downside risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 16 Jan 2019

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