• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.00/share. Our fair value is based on FY20 P/BV of 1.0x, supported by an ROE of 9.2%. Valuation remains compelling; the stock trading at 0.8x FY20 BV with an attractive dividend yield of 5.5%. We tweak our FY19 earnings slightly by -1.4% to RM4.73bil with a higher estimate for CI ratio of 53.0% vs. 52.0% previously, accounting for an increase in cost and investment expenses.

• We met the management of CIMB Group for updates. We gather that the year-to-date (YTD) FY19 loans at group level were slightly behind its targeted growth of 6.0–7.0%. This was due to the lumpy repayments for corporate loans in Malaysia in the 3Q19. Management hinted that a loan growth of 5.0–6.0% for FY19 is more achievable. Our loan growth projection for FY19 is unchanged as we have already factored in a lower loan growth of 5.0% at group level. In Malaysia, the loan trajectory for consumer loans remained stable supported by mortgages, auto loans and a pickup in pace of personal financing. Meanwhile, growth of corporate loans was slower due to repayments as aforementioned while drawdowns of wholesale banking loans in the pipeline have been delayed. The group is on target to achieve a growth of high teens for domestic SME loans in FY19 coming from a low base.

• Loans in Indonesia expanded at a faster pace YoY in 3Q19 with lower auto loans runoffs after Niaga’s recalibration strategy as well as due to an improvement in loan momentum of certain segments (corporates and smaller SMEs). In Thailand, loans are on track to achieve a low teens growth for FY19.

• Management continues to aim for a CET1 ratio of 13.0%. The group will review its plans for its capital and DRS once this target has been achieved.

• On NIM, management continues to guide for a compression of 5–10 bps at group level. In 3Q19, NIM in Malaysia is likely to improve from the deposit repricing after the OPR cut in May 2019 and stripping out MFRS 9 adjustments in the 2Q19. Over in Indonesia, NIM is expected to slip largely due to higher funding cost from deposit competition as Niaga accelerates its loan growth in 2H19. Also, contributing to the drop in Niaga’s NIM will be the slight negative impact from 3 consecutive rate cuts in Indonesia by 75bps in 3Q19. Generally, rate cuts will have minimal impact on Niaga’s margins due to the faster pace of deposit repricing in Indonesia than Malaysia. We understand that NIMs for Singapore and Thailand have been stable.

• 2Q19 saw an improvement in treasury & markets income supporting the group’s noninterest income (NOII). The strong treasury & markets income was also repeated in 3Q19. Meanwhile, bancassurance and wealth management income have also picked up pace in 3Q19. 3Q19 is likely to see gains recognized from the sale of NPLs (largely commercial loan NPLs) in Indonesia. However, the amount is likely to be significantly smaller than the RM236mil gains from the group’s disposal of the Malaysian equity business in 2Q19. It will be reported as part of the group’s NOII in 3Q19.

• YTD credit cost at group level will be slightly lower than the guided 40–50bps for FY19 despite the slight increase in provisions for Niaga in 3Q19. Recall in 2Q19, the group’s provisions were aided by write-backs from MFRS 9 adjustments. Stripping out these adjustments, we believe that the YTD credit cost will be higher than the 40–50bps guidance. In Indonesia, the guidance for Niaga’s FY19 credit cost of 150 to 200bps remains with no recovery in sight in the near term from any commodity-related loans impaired earlier.

• The group’s reported operating expenses (opex) in 3Q19 are likely to trend higher due to additional cost for another round of an MSS exercise in Indonesia. The last round of the MSS for Malaysian and Indonesian employees was in 2015 and the cost amounted to RM443mil. The MSS exercise will provide cost savings to the group starting in 2Q20. However, part of the savings from the MSS will be reinvested for digital enhancements.

• ROE guidance for FY19 for the group remains at 9.0–9.5%. Management highlighted that the group is track to achieve an ROE of 9.0–9.5% for FY19 excluding Niaga’s MSS expenses. This is after taking into account gains from sale of the 51.0% stake in CIMB Howden of RM15.8mil in 1Q19, one-off gains of RM236mil from sale of Malaysia equity business in 2Q19, net accretion to earnings from the MFRS 9 adjustment of a north of RM100mil in 2Q19 and gains from sale of Niaga’s NPLs in 3Q19.

• CIMB Niaga and group’s results are expected to be released on 31 October and 27 November respectively. We expect the 3Q19 earnings on a reported basis to be softer compared to 2Q19 due to: i) lower one-off gains under NOII and ii) higher opex from the MSS cost in Indonesia as well as from an increase in cost and investment expenses.

• We are now projecting a lower ROE of 9.0% for FY19 (previously: 9.1%) based on core earnings after raising our estimate for CI ratio. Downside risks to our expectation of the group’s ROE of 9.0% for FY19 are: i) lowerthan-expected core NOII; and ii) higher-than-anticipated opex.

Source: AmInvest Research - 25 Oct 2019