• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM6.30/share. Our fair value is based on FY19 P/BV of 1.1x, supported by an ROE of 9.9%. We have tweaked our earnings projection for CIMB Group for FY19/20 by -2.6/- 5.0% after imputing a higher assumption for CI ratio of 51.0%/51.0% (from 50.0%/49.0%) and lowering our loan growth assumption for FY19 from 5.5% to 5.0%.

• We met the CFO of CIMB Group yesterday for some updates. Operating conditions in Indonesia continue to look challenging over the next 6 to 9 months. Thus far for this year, Bank Indonesia has raised interest rates by 150bps to defend the IDR. We understand that the rate increase has fully flowed through its Indonesian subsidiary, Niaga’s liabilities resulting in higher deposit rates. Meanwhile, Niaga’s lending rates, which lagged behind adjustments in deposit rates, are only expected to be raised by 50 to 75bps this year. This, alongside the rebalancing of Niaga’s balance sheets towards better quality loans with lower yields, will compress its NIM.
  Management is still guiding for Niaga’s NIM to ease to 5.0% for the full FY18 from 5.1% in 1HFY18. We maintain our view of potentially greater pressure on the IDR with the Fed rate climbing higher. Hence, the downside risk to NIM guidance of 5.0% for Niaga remains should there be further increases in Indonesia’s interest rates.
• The group maintained its guidance for Niaga loans to grow by a low single digit in FY18. The run-up to the presidential elections coupled with the challenging macro conditions are likely to cause Niaga’s asset growth to be weaker ahead.
• Management is not overly concerned on the interest rate hikes in Indonesia impacting Niaga’s asset quality. This is in view of the fact that Indonesia has in the past been accustomed to rate increases of 100–200bps. Nevertheless, we expect some pressure on Niaga’s asset quality ahead should there be further rate increases in Indonesia to mitigate the pressure on its currency from a more aggressive Fed rate hikes.

• For 1HFY18, the depreciation of the IDR has caused a negative translation impact of RM200mil on the group’s topline. We gather that every 10% drop in the IDR will lower the group’s CET 1 ratio by 10bps. The group’s is still on track to meet its CET 1 ratio of 12.0% for FY18.

• For Thailand, provisions have declined with improvement in asset quality. This has been contributed by the shrinkage in the SME and retail loan book. Opex of CIMB Thai has increased largely due to higher personal cost for retail banking. NIM for CIMB Thai fell 11bps YoY to 3.77% for 9MFY18 as a result of lower asset yield. Management guided for CIMB Thai’s assets to grow by 6-7% in FY18.

• In 3QFY18, the performance of domestic operations is expected to be better than that of 2QFY18. On capital markets, activities for fixed income have improved in 3QFY18, particularly in July and August. Meanwhile, we gather that in Sep 2018, it was more volatile for capital markets with the focus turning to the upcoming Budget 2019. Overall, NOII for the group is expected to improve QoQ in 3QFY18. The group will be more aggressive in retail loans in Malaysia by improving its efficiency in processing of credit applications. The group hinted of a stronger retail than corporate loan growth in FY18. There is still a presence of the wait-and-see attitude by the larger corporates. For FY18, the group is eyeing a domestic loan growth of 7.0%. Onto FY19, management has guided for a slower pace of domestic loan growth of 6.0% with a slowdown in retail loans but a pickup in corporate loans.
• Management hinted that its ROE guidance of 10.5% for FY18 will remain challenging with a potentially weaker NII due to Niaga’s NIM compression. Meanwhile, on the group’s NOII (excluding one-off gains), it is expected to be lower in FY18 due to softer capital market activities in Malaysia in 1HFY18.

• Provisions are on track to meet the group’s credit cost guidance of 55-60bps for FY18. This will be an improvement from the 69bps recorded in FY17. In Indonesia, its credit cost is gradually improving with some recoveries edging towards meeting the guidance of 150 to 200bps for FY18. Meanwhile, there were also recoveries in Thailand with provisions declining towards the target of a normalized credit cost of 100 to 150bps.

• IT expenditure of RM200-300mil per year will be incurred over the next two years and this will cause the group’s CI ratio to be flat. We understand that there will be a focus to improve the back and middle office operations to enhance efficiency with the IT expenses.

• Management has maintained the following guidance for the group in FY18:
  • loan growth of 6.0%;
  • NIM compression of 5-10bps; and
  • ROE of 10.5%.

Source: AmInvest Research - 23 Oct 2018