CIMB Group Holdings - CIMB Niaga: Within Expectation

Date: 21/02/2019

Source  :  KENANGA
Stock  :  CIMB       Price Target  :  6.05      |      Price Call  :  HOLD
        Last Price  :  5.30      |      Upside/Downside  :  +0.75 (14.15%)

CIMB Niaga’s 12M18 CNP of IDR3.5t is within expectation accounting for 102% of market estimate as asset quality improved. We resist from making any changes in forward earnings pending the Group’s 12M18 results later this month. Maintain TP at RM6.05 but call downgraded to MARKET PERFORM due to demanding valuations.

Within expectations. CIMB Niaga, a 92.5% subsidiary of CIMB Group recorded a core net profit (CNP) of IDR3.48t for 12M18 which was in line with market expectations accounting for 102% of full-year estimates. CNP growth of +17% YoY was primarily driven by lower impairment allowances (-19% YoY) as top-line slumbered.

YoY, earnings supported by better asset quality and fee-based income. Top-line rebounded 1.6% primarily due to better NOII (+16.8%) to IDR4.48t as NII fell 3.2% to IDR12.0t. The weak NII was due to slower loans (by 100bps to +1.8% and below guidance of mid- single digit growth) and falling NIMs (-30bps to 4.9% (as guided). Loans were below guidance as management focused on strengthening asset quality, rebalancing its portfolio. As such, asset quality continued to improve with GIL down 64bps to 3.1% with credit charge down 43bps to 1.78% (within guidance).

QoQ, CNP was up by 8% due to a lower tax rate (27% vs. 3Q18: 32%). While top-line was down (-12% due to drag in NOII at -36%; the weakest quarter), operating profit was up by 5% due to gains in operating income. The quarter saw loans rebounded (+3%) but NIMs was marginally stable, which saw NII down by 1%. The quarter also saw asset quality mixed with GIL down by 30bps to 3.1% but credit charge up by 12bps to 1.9%.

Loan traction and NIMs becoming a risk. As guided by management, Niaga’s 2019 earnings looks challenging with loans stifled by: ((i) upcoming impending elections, and ((ii) Niaga not participating in the infra loans space. Loans will be focused on the consumer and SME space and less on commercial and corporate sectors so as to focus on strengthening asset quality. While FY19E NIM is expected at ~5%, we do not discount of additional downside pressure on NIM on account of competitive pricing. While asset quality YoY showed improvement, with management targeting credit charge <1.8%, we do not discount uptick ahead as consumers suffer from a slowdown in the economy.

Forecasts unchanged for the Group as we wait for its 12M18 results expected at the end of the month. As results were in line, Niaga’s PBT contribution to the Group level is likely at ~18% (9M18: 18%). 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. Downgraded to MARKET PERFORM as recent appreciation on its share price gives a potential total return of ~9%.

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 - 21 Feb 2019

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