• We retain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.00/share. Our fair value is supported by an FY20 ROE of 9.2% leading to a P/BV of 1.0x. Valuation of the stock remains compelling at 0.8x FY20 P/BV. We have priced in another OPR reduction of 25bps in 2H19 into our estimates. Our FY19/20/21 earnings forecast for CIMB Group have been tweaked marginally by - 1.7%/-1.8%/-2.2% to RM4.8bil/RM5.1bil/RM5.6bil.

• Niaga recorded a stronger net profit of Rp1.03tril (+9.3% QoQ) in 2Q19 underpinned by a rise in net-interest income (NII) from an improved NIM and lower operating expenses (opex) partially offset by higher provisions. 6M19 net profit grew 11.8%YoY to Rp1.98tril contributed by higher NII and non-interest income (NOII) coupled with lower provision expenses.

• 2Q19 NIM continued to rise to 5.53%, up 25bps QoQ from 5.28% in 1Q19. The improvement was due to the adjustment of lending rates higher after the earlier interest rate hikes in Indonesia cumulating to 175bps. Also, we understand that Niaga had adjusted its loan rates to increase its risk-adjusted returns. For 6M19, Niaga’s NIM was 5.41% (+32bps YoY). Nevertheless, the Indonesian subsidiary’s margin is expected to remain under pressure moving forward. Margins are expected to taper due to deposit competition as we understand that liquidity conditions in Indonesia will remain tight in 2H19. Management continues to guide for Niaga’s NIM in FY19 to be higher than 5.0% (around 5.1% or 5.2%).

• With a strong possibility of another rate cut by the US Federal Reserve as well as the recent reductions to interest rates implemented by the central banks of India, Thailand, New Zealand and the Philippines, another rate cut by Bank Indonesia (BI) is in the cards for 2H19. This will be in addition to the 25bps reduction announced by BI in July 2019. On a comforting note, any decline in benchmark interest rates by BI will have a neutral impact on Niaga as deposits in Indonesia reprice at a faster rate compared with the longer lagged reprising period of deposits in Malaysia.

• Niaga’s loan grew 2.6% YoY driven mainly by growth in mortgage loans, higher outstanding receivables for credit cards and SME loans. The overall loan growth was lower than management’s guidance of a mid-single digit expansion for FY19. Niaga’s consumer loans accelerated to 6.7% YoY. Auto loans have started to register a modest growth QoQ following its recalibration strategy. Meanwhile, its commercial banking loans contracted by 2.8% YoY as Niaga adopted a selective strategy focusing on Tier 1 commercial borrowers while its corporate banking loans grew 2.1% YoY supported by growth in investments loans, particularly infrastructure loans. The momentum for syariah banking financing eased with a moderated growth of 31.6% YoY compared with +61.1%YoY in 1Q19.

• For 6M19, Niaga’s NOII rose by 6.3% YoY mainly attributed to an increase in arranger and syndication fees, gains from FX and fixed income derivatives and higher fee income from credit cards due to its focus on acquiring merchants.

• Growth in CASA picked up pace QoQ and this led to an increase in Niaga’s CASA ratio to 53.89% in 2Q19 compared with 53.74% in 1Q19.

• Niaga's opex grew 5.7% YoY in 6M19 contributed by an increase in personal cost. Against an operating income growth of 5.7% YoY, JAWs were neutral for 6M19. 6M19 CI ratio of 49.4% was similar to that in 6M18. Niaga’s CI ratio is likely to remain at circa of 50.0% for FY19 and FY20 due to its investments in technology.

• Provisions increased by 13.6% YoY in 2Q19 resulting in a higher credit cost of 1.82% (1Q19: 1.60%). We believe that this could be the provisions for 1 corporate loan that has been classified NPL in 2Q19 related to the steel sector. Management hinted that for this loan, provisions have been adequately provided for. Corporate loan NPL ratio climbed to 1.8% from 1.0% in the preceding quarter due to the aforementioned loan. We believe that this loan is likely to be Krakatau Steel which Niaga has an exposure of circa US$190.5mil. Nevertheless, Niaga’s overall gross NPL ratio still improved to 2.87% from 3.04% in the preceding quarter. The main contributor to this was the decline in commercial loans’ NPL ratio from loan workouts and recoveries while NPL ratio for MSME (micro-small-medium enterprises) and consumer loans improved slightly QoQ.

• The percentage of loans classified as special mention decreased to 3.94% from 4.40% in the preceding quarter. We believe that this has been due to the regularization of several loan accounts. Niaga’s GIL ratio improved to 3.17% in 2Q19 vs. 3.91% in 1Q19.

• Recall, that the FRS 9 will be implemented in Indonesia in 2020. Niaga has yet to provide guidance as to the impact from the new accounting standard.

Source: AmInvest Research - 16 Aug 2019