• We maintain BUY on CIMB Group with an unchanged fair value of RM6.00/share. Our fair value is supported by an FY20 ROE of 9.0%, leading to a P/BV of 1.0x. Valuation of the stock remains inexpensive trading at 0.9x FY20 P/BV.

• The group results will be announced on 28 February. With the likelihood of lower non-interest income (NOII) in the absence of one-off gains and adjustments, coupled with the group loan growth which is not likely to substantially improve despite better loan growth for Malaysia, ROE for 4Q19 is likely to be slightly below 9.0%. Nevertheless, for the full FY19, we expect to group to deliver an ROE of 9.0% based on core earnings, which is the lower end of management’s guidance of 9.0%–9.5%. No change to our estimates for now.

• Niaga recorded a flattish core net profit of Rp966bil (-0.5% QoQ) in 4Q19. 4Q19 saw a lower operating income although offset by decline in operating expenses and provisions. 12M19 normalised net profit, excluding the one-off MSS expenses of Rp359bil in 3Q19, grew 12.4% YoY to Rp3.91tril. This was largely due to higher net interest income (NII) from an improved NIM and stronger NOII. NOII rose 11.6% YoY to Rp4.26tril in FY19 supported by recoveries and higher arranger and syndication fees. FY19 also saw challenges in Niaga’s bancassurance and fee income from trade finance.

• 4Q19 NIM slipped 15bps QoQ to 5.14%. This was attributed to a slower pace of deposit repricing by the market compared to loans after 4 consecutive rate cuts cumulating to 100bps in Indonesia in 2H19. Nevertheless for 12M19, Niaga’s NIM was still 19bps higher YoY at 5.31% due to upward adjustments of lending rates in 1Q19 and 2Q19 before interest rates were cut in 3Q19. Management hinted that deposit rates have eased recently. Niaga will be focusing on growing CASA to support its asset growth leveraging on digital initiatives. For FY20, management is guiding for a NIM of >5.0% to be anchored by a higher CASA ratio of 56.0–58.0% vs. 55.4% in FY19.

• Niaga is closely monitoring the development of the coronavirus outbreak. It likely that the benchmark rate in Indonesia would be cut by 25bps in 2020, reducing it to 4.75%. We expect this to have a neutral to a slightly negative impact on Niaga’s NIM. This is upon the condition that there will be no substantial increase in the intensity of deposit competition to allow deposits to be repriced to lower rates at a much faster pace than in 3Q19 and 4Q19.

• Niaga’s loan growth decelerated to 3.1% YoY in 4Q19 from 4.9% YoY in 3Q19 and was behind the industry’s 6.1%YoY growth. 4Q19 saw a slower momentum for MSME, commercial and corporate loans. The Indonesian subsidiary’s consumer loans picked up pace to register a higher growth rate of 10.6% YoY in 4Q19. This was driven by stronger growth in mortgages and auto loans, coupled with an increase in the outstanding of credit card receivables. Niaga’s market share for mortgage loans rose to 8.7% in 4Q19 vs. 8.1% in 4Q18. On mortgage loans, Niaga has established partnerships with platinum developers and diversified its portfolio. Growth of MSME loans remained modest at 1.9% YoY. It will continue to focus on programme lending with higher spreads which has led to an improved SME lending margins by 8bps YoY to 3.04%. Meanwhile, commercial banking loans continued to contract in 4Q19, registering a -6.8% YoY growth with Niaga adopting to be selective in underwriting to manage its asset quality. On corporate banking, loans for this segment grew 2.8% YoY supported by growth in investments loans. Niaga will focus on top-tier customers and diversify its corporate loan portfolio to reduce concentration risk. Momentum for Syariah banking financing eased further with a moderated growth of 24.9% YoY in 4Q19 vs. 29.1%YoY in 3Q19. The LDR for Syariah banking stood at 101.6% in 4Q19. For FY20, management is guiding for Niaga’s loans to grow by 6.0–8.0% from expansion in consumer loans (mortgage, credit cards and auto loans) and SME lending under the programme lending.

• Customer deposits grew 2.5% YoY compared to the industry growth of 6.5% for FY19. Time deposits contracted but CASA expanded 7.9% YoY, which is higher than the industry’s 5.9% YoY growth. CASA ratio rose to 55.4% contributed by Niaga’s digital initiatives supported by Go Mobile and CIMB Clicks which had higher number of users and transactions.

• Niaga's opex grew 3.9% YoY in 12M19 contributed mainly by an increase in personal cost in supporting the digital initiatives and plans for the group’s Forward23 strategy. Against an operating income growth of 6.3% YoY, JAWs were positive of 2.4% YoY for 12M19. 12M19 CI ratio based on normalized opex improved to 49.1% (12M18: 50.2%). We continue to expect part of these savings from the Indonesian MSS scheme implemented in 3Q19 to be plough back into IT investments to further enhance the subsidiary’s digital entablements.

• Provisions declined by 16.2% QoQ in 4Q19 resulting in a lower credit cost of 1.63% (3Q19: 1.96%). For 12M19, credit cost was 1.75% (12M18: 1.63%), which is within the guidance of 1.50–2.00%. Corporate loan NPL ratio continued to trend higher to 2.4% from 1.9% in the preceding quarter contributed by 1 or 2 chunky accounts related to the consumer goods sector. Meanwhile, NPL ratios for the other segments (commercial and MSME) were steady QoQ while that of consumer loans improved. Niaga’s overall gross NPL ratio decreased to 2.79% in FY19 from 3.11% in FY18 which we believe was contributed by the sale of NPLs. The percentage of loans classified as special mention increased to 4.95% in 4Q19 from 3.16% in the preceding quarter. Contributing to the rise was a lumpy loan related to the steel sector that was restructured and rescheduled in Jan 2019.

• FRS 9 has been implemented in Indonesia on Jan 2020. For day 1 adjustments on FRS 9, Niaga’s capital ratio was not too adversely impacted. We understand that the changes have only resulted in Niaga’s total capital ratio (CAR) to drop by 200bps or Rp5tril. The adoption of FRS 9 is not expected to have any impact on CIMB Group as the accounting standard has already been adopted at group level in 2018.

• Niaga is hopeful of an improved ROE of 11.0–12.0% for FY20. This will be underpinned by higher NII with CASA growth to improve its funding cost, a lower CI ratio than 49.0% coupled with lower provisions (credit cost of 1.75% or better) in FY20.

Source: AmInvest Research - 20 Feb 2020