• We retain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.00/share. Our fair value is supported by FY20 ROE of 9.2% leading to a P/BV of 1.0x. Valuation of the stock remains compelling at 0.9x FY20 P/BV with an attractive dividend yield of 5.7%. Meanwhile, provisions at group level are tracking close to our expectations with decent 3Q19 results of its Indonesian and Thailand subsidiaries, CIMB Niaga and Thai respectively.

• Niaga recorded a lower normalized profit of Rp971bil (-5.9% QoQ) in 3Q19 after stripping out one-off MSS expenses of Rp359bil. This was due to higher provisions despite an improvement in operating income for the quarter. 9M19 normalized net profit grew 13.7% YoY to Rp2.95tril contributed largely by higher NII from improved NIM and stronger non-interest income (NOII) supported by recoveries from the sale of NPLs.

• 3Q19 NIM slipped 24bps QoQ to 5.29% in 2Q19 mainly driven by higher funding cost from deposit competition and pressure on loan yields with 3 consecutive rate cut totalling 75bps in Indonesia in 3Q19. Nevertheless for 9M19, Niaga’s NIM was still higher at 5.37% (+25bps YoY). Pressure on the Indonesian subsidiary’s margin is expected to remain as deposit competition has turned more intense with a tighter liquidity based on an increase in industry LD ratio to 94.0%. Niaga’s LD also climbed to 99.0% in 3Q19 from 94.7% in 2Q19. With plans to accelerate loan growth in 2H19 coupled with a tighter liquidity position, we expect Niaga to drive its deposit growth more aggressively ahead. This should put more pressure on its NIM going forward. Management is hopeful for Niaga’s NIM to end FY19 at slightly above 5.0%.

• The US Fed Reserve has just lowered interest rates for the third time by 25bps to 1.50–1.75% with a tone that signalled a pause in rate cuts. This should lessen the pressure on central banks in the Asean region, including Indonesia, to cut rates further. On the earlier rate cuts by Bank Indonesia (BI) cumulating to 75bps in 3Q19, this will have a neutral to a slightly negative impact on Niaga’s NIM.

• Niaga’s loan growth accelerated to 4.9% YoY in 3Q19 compared to 2.6%YoY in 2Q19. Loan expansion was mainly driven by growth in mortgages, higher outstanding receivables for credit cards and corporate loans. Niaga’s consumer loan growth picked up pace to 8.5% YoY. Auto loans started to register a growth of 1.6% QoQ following its recalibration strategy. Focus will be more on financing of new cars in Indonesia. Growth of MSME loans was modest at 2.8% YoY. Meanwhile, commercial banking loans contracted by 5.3% YoY with Niaga adopting a selective strategy focusing on Tier 1 commercial borrowers while its corporate banking loans grew 8.3% YoY supported by growth in investments loans. Momentum for syariah banking financing eased with a moderated growth of 29.1% YoY in 3Q19 vs. +31.6% YoY in 2Q19.
• For 9M19, Niaga’s NOII rose by 12.1% YoY mainly attributed to recoveries from sale of SME and commercial NPLs, higher arranger and syndication fees, gains from FX and fixed income derivatives as well as higher fee income from credit cards due to its focus in acquiring merchants.
• Customer deposits contracted by 2.1% YoY as CASA slipped 1.3% YoY leading to a decline in Niaga’s CASA ratio to 53.7%.

• Niaga's opex grew 4.4% YoY in 9M19 contributed mainly by increase in personal cost. Against an operating income growth of 6.8% YoY, JAWs were positive of 2.4% YoY for 9M19. 9M19 CI ratio based on normalized opex improved to 48.9%. Circa 1,000 Niaga employees (7–8% of the workforce in Indonesia) took up the MSS scheme in 3Q19. Breakeven for the exercise is 18 months. This will see staffs leaving in stages with benefits from cost savings starting to be realized from 2Q20. Nevertheless, we expect part of these savings to be ploughed back into IT investments to further enhance the subsidiary’s digital enablement.

• Provisions increased by 16.7% QoQ in 3Q19 resulting in a higher credit cost of 1.96% (2Q19: 1.81%). Nevertheless, for 9M19, the credit cost of 1.79% was still within guidance of 1.50% to 2.00%. Corporate loan NPL ratio inched higher to 1.9% from 1.8% in the preceding quarter. Meanwhile, NPL ratios for the other segments (commercial, corporate and MSME) improved QoQ. Niaga’s overall gross NPL ratio decreased to 2.62% from to 2.87% in the preceding quarter which we believe has been contributed by the sale of NPLs. The percentage of loans classified as special mention continued to decline to 3.16% from 3.94% in the preceding quarter. Meanwhile, Niaga’s gross impaired loan ratio improved to 3.10% (2Q19: 3.17%).

• The FRS 9 will be implemented in Indonesia in 2020. Niaga did not to provide any guidance as to the impact on its capital ratios yet as the assessment is still in the validation stage by its consultant. Any increase in provisions from adoption of the accounting standard will be charged against Niaga’s retained earnings. This will not have any impact on CIMB Group as the standard has already been adopted at the group level earlier

Source: AmInvest Research - 1 Nov 2019