CIMB Group - Thai Unit Displayed Poor Results

Date: 16/01/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  6.00      |      Price Call  :  HOLD
        Last Price  :  5.29      |      Upside/Downside  :  +0.71 (13.42%)

CIMB Thai registered 4Q18 net loss of THB531m, falling short of estimates. That said, impact to group’s numbers is minimal as its earnings contribution is <5%. Poor results were due to lower fees, mark-to-market losses, NIM compression and higher opex. However, forecasts are unchanged, pending a meeting with management next week. We believe the stock’s risk-reward profile is still balanced as it is trading near to -1SD to both its 5-year mean P/B and P/E while offering c.5% dividend yield. Maintain HOLD with a GGM-TP of RM6.00, based on 1.03x 2019 P/B.

Below expectations. CIMB Thai (95%-owned subsidiary) reported 4Q18 net loss of THB531m (4Q17: -THB170m, 3Q18: +RM177m), bringing 2018 earnings to THB7m (- 98% YoY). This fell short of our and consensus estimates, making up only c.50% of respective full-year forecasts. That said, impact to overall group’s performance is immaterial as bottom-line contribution by the Thai unit is <5%.

YoY. In 4Q18, cost-to-income ratio (CIR) jumped 8ppt to 75% due to weak revenue (- 5%) and higher opex (+7%). For top-line, it was dragged primarily by the sluggish net fee and service income (-21%) coupled with mark-to-market losses (widened 19x). Also, net interest margin (NIM) was compressed by 20bp to 3.50%. As for opex, it was caused by the large uptick in staff costs (+17%) and rental expenses (+41%). Moreover, the surge in provision for bad loans (+18%) further amplified the quarterly loss.

QoQ. Reasons for the poor QoQ showing were similar to the above YoY trends. However, bright spot came from asset quality as non-performing loan (NPL) ratio improved 140bp to 4.3%. In turn, this led to a better loan loss coverage of 107% (+13ppt). Another positive development we noticed was tier 1 capital ratio, which grew 170bp to 14%.

YTD. Pre-provision profit fell 12% YoY due flattish revenue and higher opex (+10%). Culprits were lower forex and trading gains (-53%) and higher staff costs (+11%), which brought CIR up to 65% (+5ppt). Similarly, we saw NIM fall by 28bp to 3.35%.

Forecast. Unchanged for now, pending a meeting with management next week.

Retain HOLD and GGM-TP of RM6.00, based on 1.03x 2019 P/B with assumptions of 9.1% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year average of 1.09x and the sector’s 1.13x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath both its 5-year and industry mean. Also, this helps to explain the reason for trading near to -1SD to its 5-year mean P/B and P/E. For now, risk reward profile appears balanced. At Thailand and Indonesia, prospects are clouded by political uncertainty while in Malaysia, things are not entirely rosy. However, better asset quality and lower CIR on the group basis, are the two positive developments that we are seeing. The stock offers appealing dividend yield of c.5%.

Source: Hong Leong Investment Bank Research - 16 Jan 2019

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Labels: CIMB

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