CIMB Group - Disposal Gains and Lower Allowances Drive Earnings

Date: 01/03/2019

Source  :  Affin Hwang Capital
Stock  :  CIMB       Price Target  :  6.10      |      Price Call  :  HOLD
        Last Price  :  5.28      |      Upside/Downside  :  +0.82 (15.53%)

CIMB’s 2018 net profit of RM5.58bn was up 24.8% yoy, bolstered by asset disposal gains totalling RM1.1bn, lower overheads (due to business recalibration) and lower impaired loan allowances (-36.1% yoy; credit cost declined 28bps to 41bps). Results were in line with Affin’s and consensus estimates. On a normalized basis, net profit of stood at RM4.65bn, up 4.9% yoy. The year saw CIMB facing lower net operating income (-6.6% yoy) due to weaker fund-based income (-2.5% yoy) and a decline in non-interest income (weak capital markets returns). The consumer banking and commercial banking units (accounting for 47% and 10% of 2018 pre-tax profit, respectively) have been the key drivers of the group. A final DPS of 12 sen was proposed. Maintain HOLD and PT of RM6.10 (1.14x CY19E P/BV target).

2018 Headline Net Profit +24.8% Yoy; Core Net Profit +4.9% Yoy

CIMB Group reported a 2018 net earnings of RM5.58bn (+24.8% yoy), while on a core basis, net profit grew by a more modest 4.9% yoy to RM4.65bn. In our view, the core operatiions were relatively weak in 2018, with operating income (excluding disposal gains) down 7.4% yoy due to weaker fund-based income (-2.8% yoy) and non-interest income (-19% yoy). Despite a robust group loan growth of 7.0% yoy (driven by strong loan growth in Malaysia, which was up 10% yoy), it did not help cushion the deposit cost pressure from CIMB Niaga (Indonesia), which dampened NIM from 2.63% in 2017 to 2.5% in 2018 (-13bps yoy). The 2018 CIR ended at 52.6%, however, against its KPI of 50% under the T18 financial targets.

A More Cautious Outlook in 2019; Domestic Fundamentals Resilient

We anticipate a moderation in business activities in 2019, in Malaysia (as business sentiment remains cautious due to the global trade slowdown and geopolitical uncertainties) and Indonesia (1H19 likely to be affected by uncertainties prior to the general election in April 2019). On a more positive note, CIMB’s management has unveiled its longer-term KPIs, based on a new forward aspiration scheme, i.e. Forward 23 (2023 KPI: CIR 45%; CET1 13%; ROE 12-13%).

Maintain HOLD. PT Unchanged at RM6.10

Maintain HOLD. Our 2019-21 earnings forecasts are largely maintained. Our Price Target of RM6.10 is based on a 1.14x P/BV target on the CY19E BVPS (2019E 9.3% ROE and 8.8% cost of equity). Our 2019 assumptions include loan growth at 4.2% yoy, NIM at 2.45%, credit cost at 53bps and CIR of 51%. Downside/upside risks: Further/lower NIM pressure.

Source: Affin Hwang Research - 1 Mar 2019

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Labels: CIMB

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