CIMB Group - Indo Unit Performed to Expectations

Date: 26/04/2019

Source  :  HLG
Stock  :  CIMB       Price Target  :  5.60      |      Price Call  :  HOLD
        Last Price  :  5.26      |      Upside/Downside  :  +0.34 (6.46%)

The 6% QoQ earnings jump in 1Q19 were largely in line; this came on the back of better non-interest income, lower loan loss provision and recovery in NIM. Also, loans growth picked up momentum and asset quality improved. Overall, our forecasts are unchanged. For now, the stock’s risk-reward profile remains balanced despite its seemingly inexpensive valuations (trading near to -1SD to its 5-year mean P/B and P/E) considering the downside risk to consensus FY19- 21 earnings projection (ours are more conservative). Retain HOLD and GGM-TP of RM5.60, based on 0.98x FY19 P/B.

Within estimates. CIMB Niaga (93%-owned) registered 1Q19 earnings of IDR944bn (+6% QoQ, +8% YoY). This was in line with estimates, making up 26-27% of our and consensus full-year forecasts, respectively.

QoQ. The 6% earnings increase was thanks to the uptick in total revenue (+3%) and lower loan loss provision (-1%). We saw a rise in non-interest income (NOII, +9%) given strong syndication fee (+6-fold) and recovery income (+17%). Also, net interest margin (NIM) widened 17bp to 5.28%.

YoY. The fall in impaired loan allowances (-16%) and lower effective tax rate (-2ppt to 27%) helped to drive net profit up by 8%. However, performance could be better if not for the escalating opex (+6%), owing to higher personnel costs (+10%). Besides, total revenue growth was tepid at 1% as higher cost of funds caused net interest income to be flattish.

Other key trends. Loans growth picked up pace (+5% YoY) but was not escorted by a meaningful built up in deposits (-0.5% YoY) due to a less liquid environment. In turn, loan-to-deposit ratio (LDR) remained high at 99%. However, we saw an improvement in asset quality whereby gross impaired loans ratio improved 13bp QoQ to 3.92%.

Outlook. Although positive loan repricing should take its course (adjusting to the six interest rate hikes by Bank Indonesia in 2018), NIM improvement should be limited as management further de-risk its lending portfolio (comes with lower yield but better in quality). Also, we gathered that cost of funds has been on the rise given the lack of liquidity in the system. Moreover, with early election results indicating that President Jokowi is poised to be in power for a second term (more clarity in economic and political decisions), we see loans growth picking up further momentum in the 2H19. Management expects the dwindling of auto lending and personal financing to halt in 3Q19 while infra-related drawdown is seen to gain traction in upcoming quarters.

Forecast. Unchanged as CIMB Niaga’s 1Q19 results were in line; it contributes c.20% to group’s PBT.

Retain HOLD and GGM-TP of RM5.60, based on 0.98x 2019 P/B with assumptions of 8.9% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year mean of 1.07x and the sector’s 1.15x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath both its 5-year and industry average. Also, this helps to explain the reason for trading near to -1SD to its 5-year mean P/B and P/E. Besides, we think there is still scope for FY19-21 earnings downgrade by consensus (ours are 3-10% lower). Hence, despite its seemingly attractive valuations, the stock’s risk-reward profile remains balanced.

Source: Hong Leong Investment Bank Research - 26 Apr 2019

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