• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.00/share. Our fair value is based on an FY20 P/BV of 1.0x, supported by an ROE of 9.4%. We maintain our earnings forecast for now.

• We met the management of CIMB Group for updates. We understand the Niaga’s results are likely to be released on 13 or 14 August while that of CIMB Group will be announced on 29 August.

• We gather that for the 2QFY19 group financials, reported numbers will be complicated. This is due to FRS 9 enhancements, coupled with one-off gains from equities in Malaysia of more than RM200mil which will be positive to its non-interest income (NOII). We believe that the gains will be recognized from the disposal of the Malaysia equity business to Jupiter. The enhancement from the FRS 9 will likely to result in: i) a write-back to provisions for expected credit losses (ECL); and ii) a reduction to net interest income (NII) mainly on consumer as well as commercial banking loans from a change in effective interest rates. Both (i) and (ii), coupled with the one-off gains from equities, are anticipated to have a net positive impact on the group’s earnings in 2QFY19.

• The group’s credit cost guidance remains 40–50bps for FY19. Nevertheless, we expect some weakness in the asset quality of corporate loans in Indonesia.

• We understand that the recent interest rate cut by 25bp to 5.75% by Bank Indonesia will have a neutral impact on CIMB Niaga’s NIM as deposit rates will reprice downwards swiftly, unlike in Malaysia. The group is expecting another rate cut in Indonesia. Management is guiding for a NIM of 5.1% or 5.2% for Niaga largely due to funding cost pressure in Indonesia in 2HFY19. It is maintaining its 5–10bps margin compression guidance for the group in FY19.

• We understand that the decline in NII from the adjustments due to the FRS 9 will lower the group’s reported interest income. Nevertheless, the reported group NIM for 6MFY19 will still fall within the 5–10bp compression guidance for FY19. Core NIM will be higher than the reported margin due to the negative impact on interest income from the adjustments in the FRS 9.

• Management continues to aim for its CET1 ratio to be >12.0%. The disposal of its Malaysia equity business to Jupiter will results in a negative 10bps to its capital ratio.

• In 2QFY19, the pipeline for capital market deals remains similar to 1QFY19, and it is only a matter of successful execution to translate that into fee income for the group. We understand that there were some pick-up in the capital markets business in May and June 2019. However, the overall fee income is still subdued. For 2QFY19, treasury income is likely to improve with one-off gains recognized from the aforementioned disposal of equities.

• The group is still on track to meet its loan growth target of 6.0% for FY19.

• In Malaysia, deposit competition has eased slightly post-OPR cut in May 2019. Meanwhile, in Indonesia, Niaga’s NII is likely to gain momentum after the presidential election as well as the tapering in the run-offs for auto loans. Over in Thailand, loan growth is picking up pace while NIM has been compressed due to the rate hike in Dec 2018. CIMB Thai’s CI ratio climbed due to expenses incurred for its Fast Forward strategy. We understand that the asset quality in Thailand is holding up. In Singapore, we gather that NIM is improving with the tweak in loan mix more towards higher yielding commercial loans while funding cost has been stable. Growth in NOII has been modest while asset quality in Singapore remains stable despite concerns on the US-China trade tension.

• ROE guidance for FY19 remains at 9.0–9.5% due to the bulk of group’s investments (mainly IT expenses) required for the first 2 years of its Forward 23 strategy. Nevertheless, a slower fee income without a much improved traction for capital market activities in 2HFY19 could possibly result in the group ROE falling below 9.0% in FY19 after stripping out one-off gains.

Source: AmInvest Research - 25 Jul 2019