CIMB Group - No Surprises From Indo Unit

Date: 21/02/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  6.00      |      Price Call  :  HOLD
        Last Price  :  5.34      |      Upside/Downside  :  +0.66 (12.36%)

As expected, CIMB Niaga’s 4Q18 net profit rose 8% QoQ on the back of lower loan loss provision and taxes. The only bright spot was improving asset quality. That said, NIM compressed and loans growth momentum is still weak. All in, our forecasts are unchanged. We believe CIMB’s risk-reward profile is balanced despite trading near to -1SD to both its 5-year mean P/B and P/E given there is downside risk to street’s 2019-20 earnings projection (we are conservative vs them). Retain HOLD with a GGM-TP of RM6.00, based on 1.03x 2019 P/B.

In line. CIMB Niaga (93%-owned subsidiary) posted 4Q18 earnings of IDR891b (+8% QoQ, +14% YoY), which brought 2018 net profit to IDR3,483b (+17% YoY). This was within expectations, making up 103% of both our and consensus full-year forecasts.

QoQ. The 8% earnings uptick was due lower loan loss provision (-5%) and taxes (- 12%). However, we saw non-interest income (NOII) falling 5%, no thanks to weaker forex (-14%) and recovery income (-22%). Also, net interest margin (NIM) slipped 6bp to 5.11% during the quarter.

YoY. Similar to QoQ basis, falling impaired loan allowances (-22%) and taxes (-23%) boosted bottom-line (+14%). Without this, pre-provision profit would have dipped 9%. The drag came from opex spurt (+4%) as general and administrative cost swelled 11%. Also, total income was of little assistance (-3%) with fee and commission income dipping 14%. Another blip was net interest income (NII) which narrowed 1% due to NIM pressure (-9bp) and weak loans growth (+2%).

YTD. The year concluded with an earnings jump of 17%, owing primarily to lower provision for bad loans (-26%). We noted this had single-handedly more than offset the negative Jaw created by higher opex (+6%) and weak NII (-3%).

Other key trends. As mentioned, loans growth momentum is still subdued at 2% YoY. Hence, deposits loss some pace, expanding only at 1% YoY (vs 3Q18’s 4%) since there were no strong push factor. That said, we saw continuous improvement in asset quality whereby gross impaired loans ratio fell 29bp QoQ to 4.05%.

Outlook. We should still see sequential NIM contraction given CIMB Niaga’s reduced credit risk appetite that would alter its loan mix to lower yielding assets. Loans growth in 1H19 is likely to stay muted (low single digit YoY growth) due to the upcoming general election in April but should pick up pace in 2H19. Overall, asset quality is expected to remain robust.

Forecast. Unchanged as CIMB Niaga’s 4Q18 results met expectations. It contributes c.18-20% to group’s PBT, which is substantial.

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 mean of 1.09x and the sector’s 1.17x. The discounts are fair due to its lower ROE, which is 1ppt beneath both its 5-year and industry averages. For now, the stock’s risk-reward profile seems balanced. Although CIMB is trading close to -1SD to its 5-year mean P/B and P/E, we think there is still scope for 2019-20 earnings downgrade by the street (too bullish with their projections but we are already 2-6% more conservative vs them). We note that this trend of gradual earnings cut was apparent over the past 9-10 months, which we believe could have partially capped its recent share price performance.

Source: Hong Leong Investment Bank Research - 21 Feb 2019

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