Investment Highlights

• We upgrade our call on CIMB Group Holdings (CIMB) to BUY from HOLD with a revised fair value (FV) of RM5.20/share (previously: RM4.10/share) after rolling over our valuation to FY22. Our revised FV is based on FY22 ROE of 7.0%, leading to a P/BV of 0.8x. We retain our earnings estimates. Valuation remains undemanding with the stock trading at 0.7x P/BV. Also, CIMB is one of the systematically important banks that is envisaged to post improved earnings riding on the economic recovery.

• Niaga reported an improved net profit of Rp148bil (+23.3% QoQ) in 4Q20. This was due to higher operating income from an uplift in net interest income (NII) partially offset by increase in provisions. The Indonesian subsidiary’s NOII declined QoQ in 4Q20 largely attributed to lower gains from marketable securities.

• For 12M20, Niaga’s core net profit came in at Rp2tril (- 48.6% YoY) on lower NII from the contraction in loans and NIM. NOII fell largely due to lower fees, commission income and recovery income with the non-repeat of the substantial gains from the sale of NPLs in 12M19.

• NIM stabilized in 4Q20 at 4.72% (3Q20: 4.70%). Compared to 4Q19, loan yield declined but Niaga has reduced its funding cost to stabilise its NIM. For 12M20, Niaga’s NIM fell 43bps to 4.88% contributed by the build-up of additional liquidity which saw deposits growing at a faster pace than loans resulting in a lower LDR of 82.9%. Moving ahead, Niaga hopes to further lower its funding cost. The central bank has recently lowered the BI rate (7- day reverse repo rate) by another 25bps to 3.5%. The impact of the rate cut was widely expected by market and will be insignificant to Niaga’s NIM.

• Niaga’s loans shrank by 3.4% QoQ or -10.0% YoY in 4Q20. YoY, consumer loans registered a tepid growth of 1.7% contributed by expansion in mortgage and auto loans. Meanwhile SME, commercial and corporate banking loans registered slower growth. Niaga remains cautious on commercial loans and will be selective on loans to commodity sectors.

• 12M20 saw Niaga’s total assets expanding by 2.4% YoY due to the increase in holdings of government bonds and marketable securities.

• Niaga registered a customer deposit growth of 6.1% YoY for 12M20 contributed by a strong CASA growth of 14.3% YoY while the more expensive time deposits contracted. The change in deposit mix led to an increase in CASA ratio to 59.62% in 12M20 vs. 55.35% in 12M19.

• Niaga's opex decreased by 3.0% YoY in 12M20 with lower promotion, general and admin expenses. Personal expenses rose by 5.1% YoY. Opex is likely to grow in line with the inflation rate of 2–4% in FY21 due to the need to invest in IT platforms/systems. Against an operating income growth of -2.8% YoY, JAWs was a mildly positive 0.2% YoY for 12M20. 12M20 CI ratio improved moderately to 48.9% (12M19: 49.1%).

• The higher provisions QoQ in 4Q20 have resulted in a rise in credit cost to 3.82% from 3.18% in 3Q20. 12M20 saw an increase in credit cost to 2.83% vs. 1.75% in 12M19, close to management’s guidence of 2.50%–2.80% for FY20. The rise in provisions was contributed by: i) Niaga’s first year in adoption of FRS9; and ii) allowances for credit losses booked in from adjustments to macroeconomic variables as well as through management overlays.

• Niaga’s gross impaired loan ratio rose to 6.03% in 4Q20 vs. 4.98% in 3Q20. Overall gross NPL for Niaga decreased to 3.62% in 4Q20 vs. 3.89% in 3Q20. Meanwhile, the percentage of loans classified as special mention climbed to 6.33% from 4.48% in the preceding quarter. On a QoQ basis, NPL ratio for corporate and consumer loans improved to 4.1% and 1.8% respectively. In contrast, NPL ratio for SME and commercial loans edged up QoQ to 2.8% and 5.7% respectively.

• As of 12M20, the amount of loans impacted by Covid-19, which were restructured, decreased to Rp25.5tril (corporate: 24.0%, commercial: 20.0%, SME: 16.0%, consumer: 40.0%) in 4Q20. This was lower compared to Rp28.6tril in 3Q20 with a decline in commercial loans under R&R. It represented 14.6% of Niaga’s total loans vs. 3Q20’s 15.8% of loans under R&R. On a comforting note, the percentage was lower than the 18–20% by endFY20 hinted by management during the last results briefing.

• The amount of loans at risk (LAR) of Niaga stood at Rp40.3tril (23.0% of the total loans). By segment, for LAR, corporate loans were the largest at Rp14.1tril, followed by consumer, commercial and SME loans at Rp11.6tril, Rp10.0tril and Rp4.6tril respectively. The coverage for LAR has risen to 30.0% vs. 26.5% in the preceding quarter and was 3–5 ppts higher than the industry average.

• Niaga’s earnings are expected to be stronger in FY21 with optimism on the vaccination programme likely to boost consumer and business sentiment leading to an economic recovery in Indonesia. Core fee income is expected to rise and be supportive of Niaga’s NOII in FY21. Management has guided for an improvement in Niaga’s FY21 loan growth, expanding by 3–5% with a lower credit cost of 2.4–2.6% (FY20: 2.83%). On Niaga’s FY21 NIM, the guidance was 4.8–5.0% vs. 4.88% in FY20. Meanwhile, FY21 ROE guidance was higher at 7.0–9.0% compared to FY20’s 5.01% supported by a CI ratio of <49.0%.

Source: AmInvest Research - 22 Feb 2021