• We maintain HOLD on CIMB Group Holdings (CIMB) with an unchanged fair value of RM3.10/share based on a FY21 ROE of 4.9%, leading to a P/BV of 0.5x.

• Niaga reported a weaker net profit of Rp120bil (-82.6% QoQ) in 3Q20 due to lower operating income, higher operating expenses and provisions. The Indonesian subsidiary’s net interest income (NII) slipped by 2.5% QoQ due to contraction in loans and compression in NIM. 3Q20 saw a decline in FX and derivatives income and card-related fees which lowered Niaga’s NOII by 3.2% QoQ. Meanwhile, provisions climbed 25.5% QoQ with the inclusion of the top-up in allowances for loan losses for legacy loans.

• 9M20 Niaga’s normalized earnings declined by 36.8% YoY to Rp1.86tril contributed by lower NII and NOII, coupled with higher provision expenses. NII slid by 2.3% YoY while NOII fell 12.1% YoY due to lower fees and commissions, bancassurance, card-related fees and recovery income.

• Since the last rate cut of 25bps on 16 July 2020 to 4.0%, Bank Indonesia has kept the benchmark interest rate (7-day repo rate) unchanged. We understand that the compression in Niaga’s NIM in 3Q20 by 37bps QoQ to 4.71% was a result of the lagged adjustments to the earlier interest rate cuts. Also, it was impacted by the decline in outstanding loans which lowered its asset yield. For 9M20, Niaga’s NIM stood at 4.93% a drop of 44bps YoY.

• Niaga’s loans shrank by 2.8% QoQ or -5.6% YoY in 3Q20 due to its focus on asset quality. On a QoQ basis, SME, commercial and corporate banking registered a slower growth in loans while that of consumer banking grew modestly. For consumer banking loans, mortgages, credit cards and auto loans expanded but this was dampened by the slowdown in personal loans. Syariah banking financing declined by 3.9% QoQ.

• Niaga registered a stronger customer deposit growth of 11.3% YoY for 9M20 contributed by a strong CASA growth of 25.1% YoY while time and structured deposits contracted. 3Q20 saw an increase in time and structured deposits by 5.9% QoQ leading to a slight decline in CASA ratio to 60.31% vs. 61.03% in 2Q20.

• Niaga's opex decreased by 3.2% YoY in 9M20 with a muted growth in personal expenses. Against an operating income growth of -4.9% YoY, JAWs were negative of 1.7% YoY for 9M20. 9M20 CI ratio rose slightly to 48.9% (9M19: 48.1%) owing to a weaker operating income.

• The higher provisions QoQ in 3Q20 have resulted in a 3.18% rise in credit cost to from 3.01% in 2Q20. 9M20 saw an increase in credit cost to 2.56% from 1.79% in 9M19. Management hinted that Niaga’s credit cost is likely to be at the higher end of the guided range of 2.50%–2.80% for FY20. We estimate that 4Q20 could see further increase in provisions by Rp1.4tril to raise Niaga’s credit cost to 2.80% for the 12M20. This will be a substantial amount that will continue to weigh on Niaga’s earnings in 4Q20.

• Niaga’s gross impaired loan ratio fell to 5.00% in 3Q20 vs. 5.18% in 2Q20. Overall gross NPL for Niaga was sustained at 3.9% in 3Q20 while the percentage of loans classified as special mention has decreased to 4.48% vs. 5.18% in the preceding quarter. On a QoQ basis, NPL ratio for corporate loans climbed to 5.1% compared to 4.6% in 2Q20. Meanwhile, NPL ratio for SME and consumer loans improved QoQ while that of commercial loans rose 0.3% QoQ to 5.2%.

• As of 9M20, the amount of loans restructured has increased to Rp28.6tril (corporate: 24.0%, commercial: 26.0%, SME: 14.0%, consumer: 36.0%). This represented 15.8% of Niaga’s total loans vs. 1H20’s 12.3% (Rp22.8tril loans restructured). QoQ, the percentages of restructured corporate and commercial loans have risen. The overall percentage of restructured loans is likely to continue to gradually increase to 18–20% by the end of FY20 with headwinds to asset quality still persisting.

• Niaga will continue to focus on growing its market share in consumer and SME loans and deposits. Additionally, it will recalibrate its commercial and corporate banking business, grow treasury and wealth management businesses and expand its CASA

Source: AmInvest Research - 9 Nov 2020