• 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 9.1%. Valuation remains compelling; the stock trading at 0.9x FY20 BV with an attractive dividend yield of 5.1%. We leave our earnings estimate unchanged for now.

• Management met analysts recently to provide updates on the group. We gather that in Indonesia, loan growth and revenue are both picking up pace with a decent performance for Niaga in 4Q19. The corporate segment is gaining traction, and Niaga will continue to focus on growing consumer loans. Meanwhile, the Indonesian subsidiary remains cautious on MSME loans.

• Deposit competition still persists in Indonesia, and this has resulted in a drop in Niaga’s NIM in 4Q19 vs. 3Q19. Nevertheless, Niaga’s NIM will still be above 5.0% for FY19 as guided earlier.

• We understand that at the group level, top-up provisioning has been made for 1 to 2 loans in Indonesia. These are loans to state-owned enterprises related to the infrastructure sector. The loans are still performing, and additional provisioning was taken due to the deterioration in staging. Hence, credit cost at group level in 4Q19 is likely to be slightly higher than in 3Q19, thus ending FY19 at slightly below the middle of the guidance of 40–50bps.

• Recall, the group has adopted the FRS 9 in January 2018. Indonesia and Thailand have both recently implemented the FRS 9 on January 2020. We understand that for day 1 adjustments for the FRS 9 in Indonesia, write-backs and provisions made were not significant with the total capital adequacy ratio (CAR) still standing comfortably above 18.5% compared to 21.2% in 3Q19. Meanwhile, in Thailand, the additional provisions taken for adoption of the new accounting standard did not have any material impact on CIMB Thai’s earnings.

• The group’s loan growth ended FY19 within its guidance of 5.0–6.0%. For FY19, we have already penciled in a group loan growth of 5.0%. In 4Q19, loans in Malaysia have improved with drawdowns of certain corporate loans. Nevertheless, this has not significantly expanded the group’s overall loan book. The outlook for loan growth is modest for the group in FY20 with a potentially stronger 2H20 growth from commercial and corporate loans.

• Competition for deposits is stable in Thailand for now. However, the intensity of competition is likely to increase once asset growth gains momentum, resulting in higher funding cost for CIMB Thai. In Malaysia, competition for deposits has not intensified in 4Q19 compared to 3Q19 as liquidity remained ample while loan growth outlook remains moderate.

Source: AmInvest Research - 21 Jan 2020