CIMB Group - Weaker NIM, slower loan growth dampen Niaga’s interest income

Date: 21/02/2019

Source  :  AmInvest
Stock  :  CIMB       Price Target  :  6.30      |      Price Call  :  HOLD
        Last Price  :  5.23      |      Upside/Downside  :  +1.07 (20.46%)

  • We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM6.30/share. Our fair value is supported by an FY19 ROE of 9.7%, leading to a P/BV of 1.1x.
  • Niaga has reported lower provisions, which is positive in our opinion. However, the group’s operating income is still expected to be soft for the full FY18. This is due to the compression in margin impacting Indonesia interest income, coupled with lower non-interest income (NOII) from a slowdown in capital market activities. As CIMB Group is scheduled to release its 4QFY18 results on 28 February, we make no changes to our estimates for now.
  • For 4QFY18, Niaga reported a net profit of Rp891bil (+8.1%QoQ) with a lower operating income, partially offset by an improvement in operating expenses (opex) and lower provisions. Niaga’s 12MFY18 earnings grew 16.9%YoY to Rp3.48tril. This was largely attributed to a higher non-interest income (NOII) of 13.8%YoY, supported mainly by an increase in recovery and treasury income. Asset quality continues to improve as evidenced by lower GIL and gross NPL ratios of 4.05% and 3.11% respectively in 4QFY18. This was contributed by the improvement in the asset quality of commercial loans.
  • Meanwhile, net interest income (NII) for its Indonesian subsidiary in 12MFY18 fell 3.2%YoY. This is attributed to the compression in NIM following a series of interest rate hikes in Indonesia where the rates for deposits were repriced ahead of loans. NIM declined to 5.12%, a drop of 48bps in FY18 compared with 5.60% in FY17. This was better than management’s guidance for FY18 NIM of circa 5.0%. NIM could still be under pressure in the near term as the group focuses on growing better quality loans, sacrificing yields for lower credit cost while CASA growth is seen slowing down QoQ with liquidity conditions remaining tight in Indonesia. Also potentially, there could be further interest rate hikes in Indonesia by another 50bps in 2019 following the increase in the Fed’s rate. Management is hopeful of keeping its NIM close to 5.00% for FY19 and continues to focus on optimizing CASA to mitigate the margin pressure.
  • Loan growth continued to be subdued at 1.8%Y for FY18. This has been dragged by a contraction in auto loans as financing in this segment continued to be realigned. FY18 saw a decent growth in SME banking loans although dampened by flattish growth in consumer, commercial and corporate loans. Niaga’s consumer loans expanded 0.9%YoY as a contraction in auto loans as well as slower personal, pension and multipurpose loans offset a growth in mortgage loans of 11.2%YoY. Elsewhere, growth in commercial and corporate banking loans was both muted at 0.6%YoY while financing for syariah banking grew strongly by 58.8%YoY.
  • Management of Niaga has guided for mid-single digit loan growth for FY19. In our view, loan growth in Indonesia will remain challenging in the near term. This is in view of the upcoming presidential elections in 1HFY19. This may result in borrowers turning conservative and adopting the wait-and-see attitude pending the outcome of the elections. Any meaningful pick-up in economic activity and loan growth in Indonesia is expected only in 2H2019. Niaga is focused on growing consumer, SME and drawdowns of infrastructure-related loans.
  • Niaga's opex grew by 5.7%YoY in FY18. This was contributed by investments in technologies to facilitate greater digitalization of its banking services as well as an increase in personal cost. Against an operating income growth of 0.5%YoY, Niaga recorded a negative JAW of 5.2% in FY18. FY18 CI ratio rose to 50.2%.
  • Provisions declined significantly by 25.7%YoY in FY18. Credit cost improved to 1.52% in FY18 (FY17: 1.67%) and was within management's guidance of 1.50%– 2.00% for FY18. For FY19, management is guiding for credit cost of below 1.50% for Niaga.
  • 4QFY18 saw NPL ratio for corporate loans declining further to 1.3% while commercial loans NPL ratio dropped 70bps QoQ to 7.9%. NPL ratio for MSME loans remained stable at 3.0% while that for consumer banking loans improved to 2.5%. 4QFY18 saw the percentage of loans classified as “special mention” reduced to 3.98% from 4.79% in the preceding quarter.
  • Management of Niaga is guiding for double-digit ROE for FY19. which in our view is challenging.

Source: AmInvest Research - 21 Feb 2019

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