• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM5.80/share. Our fair value is supported by an FY19 ROE of 9.4% leading to a P/BV of 1.0x. Valuation of the stock remains compelling at 0.9x FY19 P/BV. We believe concerns on the group’s weaker revenue and lower ROEs for FY19 and FY20 as a result of investment expenses ahead for the Forward 23 strategy have been priced in.

• CIMB Niaga recorded an improved net profit of Rp944bil (+5.9% QoQ; 7.6% YoY) in 1QFY19 driven by stronger non-interest income (NOII) and lower provisions partially offset by higher operating expenses (opex). This led to an ROE of 9.48% which was close to its double-digit target for FY19. The improvement in NOII was mainly attributed to an increase in arranger and syndication fees. We understand that capital market activities are starting to gain traction.

• Net interest income (NII) for its Indonesian subsidiary was flattish with a growth of 0.2% YoY in 1QFY19. Interest income grew from an expansion in loan book but was offset by higher interest expenses. Funding cost rose due to stronger deposit competition.

• 1QFY19 evidenced the gradual upward repricing of loans following the series of interest rate hikes in Indonesia. As a result, NIM rose to 5.28% in 1QFY19, up by 17bps QoQ from 5.12% in 4QFY18. Niaga’s NIM is expected to remain under pressure in the near term. This was due to the increase in intensity of deposit competition as liquidity conditions in Indonesia remain tight. Nevertheless, with the slowdown in the normalization of the US monetary policy, the pressure of further hikes on BI’s rates is abating. This follows the lower possibility of any Fed rate increase in 2019. Even though Niaga’s NIM is still expected to be compressed in the subsequent quarters from the level in 1QFY19, the pressure on margins in FY19 is anticipated to be lower than in FY18. Recall in 2018, BI raised the benchmark interest rates by a cumulative 175bps. Management’s guidance for Niaga’s NIM for FY19 is similar to FY18’s at circa 5.0%.

• Loan growth picked up pace to 5.0% YoY in FY19 underpinned by stronger momentum in mortgage and corporate banking loans. SME loans registered a decent growth of 8.1% YoY. The overall loan growth was in line with management’s guidance of a mid-single-digit expansion for FY19. Niaga’s consumer loans accelerated to 3.7% YoY, and we understand that the run-off in auto loans due to its recalibration strategy will cease by 2QFY19. Management guided that the growth in auto loans will turn positive beginning 3QFY19. Commercial banking loans registered a slightly higher growth of 2.1%YoY while the growth in corporate banking loans climbed to 6.6% YoY supported by disbursements of infrastructure loans. Syariah banking financing continued to be strong with an expansion of 61.1% YoY.

• Growth in CASA, which management is hoping to shore up to manage Niaga’s pressure on NIM, continues to be slow in 1QFY19. Niaga is targeting higher deposit growth through digital channels.

• Niaga's opex grew 6.0% YoY in 1QFY19 contributed by an increase in personal cost. Against an operating income growth of 1.1% YoY, JAWs remained negative (-4.9%). This led to 1QFY19 CI ratio of 50.9%. Niaga’s CI ratio is likely to remain at circa of 50.0% for FY19 and FY20 due to its investments in technology.

• Provisions fell by 16.2% YoY in 1QFY19 resulting in an improved credit cost of 1.60% (1QFY18: 1.79%). Recall for FY19, management has guided for a credit cost of below 1.50% for Niaga.

• Niaga’s asset quality continues to improve with a lower GIL and gross NPL ratios of 3.91% and 3.04% respectively in 1QFY19. Compared with the previous quarter, NPL ratios for corporate, commercial and consumer loans have improved while an uptick in NPLs was observed for MSME loans. The percentage of loans classified as special mention rose to 4.40% from 3.92% in the preceding quarter attributed to several loan accounts. Nevertheless, this is expected to be regularized after 1QFY19.

• The FRS 9 will be implemented in Indonesia in 2020. Niaga is still assessing the impact from the new accounting standard.

Source: AmInvest Research - 26 Apr 2019