• We maintain our HOLD call on CIMB Group with an unchanged fair value of RM3.60/share. Our fair value is supported by FY20 ROE of 6.7%, leading to a P/BV of 0.6x. Potentially, there could be headwinds ahead to the group’s asset quality in Singapore and Indonesia, and we have already factored in a higher credit cost of 0.7% (previously: 0.6%) for FY20. We make no changes to our estimates.

• Niaga reported a higher net profit of Rp1.07tril (+9.2% QoQ, +11.8% YoY) in 1Q20. The improvement YoY was contributed by stronger non-interest income (NOII) and lower operating expenses (opex). Net interest income (NII) was flat at 1.0% YoY with a lower net interest margin (NIM) despite expansion in loans. NOII rose 11.5% YoY to Rp1.15tril in 1Q20 supported largely by higher income from FX and derivatives, coupled with gains from marketable securities. The volatility in 1Q20, which contributed to higher spreads, was positive on FX income.

• 1Q20 NIM slipped 26bps YoY to 5.02%. This was attributed to a slower pace of deposit repricing by the market compared to loans. Recall, there were 4 consecutive rate cuts cumulating to 100bps in Indonesia in 2H19. Additionally, the central bank of Indonesia has further reduced the benchmark interest rate to 4.50% by 25bps each in Feb and Mar 2020. For FY20, management is guiding for a NIM of 5.0% to be anchored by its high CASA ratio. Niaga is shedding the expensive time and structured deposits while focusing on growing CASA. This should lower its funding cost, thus mitigating the pressure on interest margin from the consecutive rate cuts.

• Niaga’s loan growth remained modest at 3.3% YoY in 1Q20 (4Q19: 3.1% YoY). Excluding the FX impact caused by the depreciation of the rupiah, loans of the Indonesian subsidiary expanded only by 1.4% YoY. Loan growth continued to be driven by consumer banking while Niaga stayed cautious on SME and commercial loans. On consumer banking loans which grew 9.8% YoY, this was mainly driven by mortgages (+11.6% YoY), credit cards (+8.9% YoY) and auto loans (+6.2% YoY). Personal loans rose 3.8% YoY. MSME and commercial loans contracted by 7.0% YoY and 11.0% YoY respectively with a selective approach in underwriting new credits to manage its asset quality. On corporate banking, loans for this segment climbed 7.0% 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 23.0% YoY in 1Q20 vs. 24.9% YoY in 4Q19. The LDR for syariah banking rose to 113.7%. Management is guiding for Niaga’s loan growth to be flat in FY20 compared to earlier guidance of 6.0–8.0%.
• Customer deposits growth surged to 6.3% YoY with a stronger CASA growth of 18.3% YoY. Growth in corporate balances increased its current account deposits. Also, savings deposits grew with the expansion of retail depositors’ placement of funds. Time and structured deposits contracted with the intentional strategy of letting go expansive deposits. The change in deposit mix has led to an increase in CASA ratio to 60.1% in 1Q20 vs. 53.7% in 1Q19.
• Niaga's opex decreased by 2.8% YoY in 1Q20. Against an operating income growth of 3.7% YoY, JAWs were positive of 6.4% YoY for 1Q20. 1Q20 CI ratio improved to 47.8% (1Q19: 50.9%).

• Provisions decreased by 2.1% QoQ in 1Q20 resulting in a lower credit cost of 1.51% (4Q19: 1.63%). For FY20, Niaga is now guiding for credit cost of 1.80% to 2.30%, higher than the earlier guidance of 1.60% to 1.80%. This is due to the potential headwinds in asset quality from Covid-19. Indonesia was slower relatively compared to the other Asian countries in addressing the virus outbreak, and coupled with the lesser aggressive measures comparatively, we are more concerned on the impact on the country’s banking sector. All segments (corporate, commercial, SME and consumer) NPL ratios trended higher in 1Q20 compared to the preceding quarter. Overall gross NPL rose to 3.03% in 1Q20 (4Q19: 2.79%). Niaga’s gross impaired loans (GIL) ratio climbed to 4.38% in 1Q20 from 3.81% in 4Q19. The percentage of loans classified as special mention rose to 8.10% in 1Q20 from 4.95% in the preceding quarter which we understand was due to restructuring of certain loans. We gather that it has received requests to restructure and reschedule loans, and this accounted for 6– 8% of the its total loans. The percentage could increase to 15–20% by the end of this year with headwinds to its asset quality ahead.

• FRS 9 has been implemented in Indonesia on Jan 2020. The changes have contributed to the drop in Niaga’s total capital ratio (CAR) by 208bps to 19.39% in line with the guidance earlier. Its total equity fell by Rp3.26tril to Rp40.0tril while loan loss coverage ratio surged to 191.13% with higher provisions after the adoption of FRS 9. 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 hinted of a potentially a single-digit ROE for FY20 as compared to the earlier guidance of 11.0–12.0%.

Source: AmInvest Research - 12 May 2020