Investment Highlights

• We maintain our BUY recommendation on CIMB Group Holdings (CIMB) with an unchanged fair value of RM6.20/share based on FY22 ROE of 9.8% leading to a P/BV of 1.0x. We make no changes to our earnings estimate for now.

• Niaga recorded a lower core net profit of Rp992bil (-6.3% QoQ) in 4Q21. This was attributed to the decline in operating income, higher operating and provision expenses. Operating income slipped 1.3% QoQ due to lower net interest income (NII).

• For 12M21, Niaga’s normalised net profit of Rp4.22tril grew 109.4% YoY. The improved earnings were underpinned by stronger NII and non-interest income (NOII) and lower provisions.

• NIM in 4Q21 was compressed to 4.47% (3Q21: 4.84%) due to lower yields from loans and bonds. 4Q21 saw the reversal of interest accruals for consumer and emerging business banking (EBB) loans with the end of repayment assistance for these 2 segments. Management alluded to further reversal of interest accruals in 1Q22. Nevertheless, the amount will be much lower than 4Q21.

• 12M21 NIM was 4.86%, a 2bps decline YoY. Lower interest income was partially offset by a drop in funding cost from the optimization of deposits. Management hinted that the interest rates in Indonesia could be hiked by up to 50bps in 2H22. The impact of a 25bps rate hike will be neutral on Niaga’s NIM.

• The number and value of digital transactions through OCTO Mobile and Clicks have continued to gain traction. Total digital revenue expanded 36.5% YoY for 12M21. Niaga continues to digitize its consumer lending business with the launch of Octo Friends in Aug 2021 to acquire mortgage deals digitally. Also, Octo cards and loans have been made available via digital applications and approvals of credit cards and personal loans.

• The Indonesian subsidiary’s loans picked up pace in 4Q21 supported by consumer (mainly mortgage and auto financing), EBB and corporate loans. Meanwhile, commercial loan growth continued to be subdued with Niaga recalibrating its commercial banking business. For 12M21, Niaga’s loans grew 3.9% YoY.
  In FY22, management is guiding for a higher loan growth of 4.0–6.0%. This will be supported by stronger growth from most segments except for commercial loans which will still be flattish.
• Niaga’s customer deposit growth accelerated to 16.3% YoY in 12M21 underpinned by stronger CASA and time deposits which grew by 19.7% YoY and 11.3% YoY respectively. CASA ratio climbed to 61.3% in 12M21 vs. 59.6% in 4Q20. Niaga continues to be flush with liquidity with a low LDR of 74.4%.
• 4Q21 saw a growth in NOII by 9.9% QoQ driven by higher wealth management and card fees as well as a surge in FX and derivatives income. The Indonesian subsidiary’s NOII rose by 15.2% YoY for 12M21 supported by higher fee & commission, gains from marketable securities and income from loan recoveries.

• On syariah banking, financing gained momentum with a stronger growth of 15.8% YoY while deposits expanded by 39.2% YoY. 12M21 PBT for syariah banking increased by 34.8% YoY.

• With cost optimization (lower establishment, general and admin expenses), Niaga's opex was flat (+0.7% YoY) in 12M21. 12M21 JAWs were positive of 6.7% YoY. CI ratio improved to 45.9% for 12M21 attributed largely to a stronger top line.

• Credit cost was stable QoQ at 2.1% in 4Q21. For 12M21, credit cost stood at 2.40% within the guidance of 2.40–2.60% for FY21. Niaga remains prudent on provisions with management overlays provided for potential credit losses of loans at risk (LAR). Management guided for a lower credit cost of 2.1–2.3% for FY22.

• Niaga’s gross impaired loan ratio fell to 6.7% in 4Q21 vs. 6.9% in 3Q21. Meanwhile, gross NPL for Niaga rose slightly to 3.5% vs. 3.4% in the preceding quarter contributed by certain consumer and EBB loans moving into NPL status after the end of repayment assistance. Nevertheless, Niaga’s loan loss coverage ratio and impaired LLC remained high at 212.1% and 108.6% respectively.

• As of end-4Q21, the amount of loans impacted by Covid-19 which were restructured continued to be on a declining trend. It fell to Rp21.6tril in 4Q21, representing 11.9% of Niaga’s total loans vs. Rp23.5tril in 3Q21.

• LARs, including those impacted by Covid-19, shrank to 20.3% from 22.5% in the preceding quarter. This has increased Niaga’s coverage for LARs to 45.6% in 4Q21.

• Other guidance from management for FY22 are: i) higher ROE of 11.0–12.0%; ii) CI ratio of <45.9%; and iii) NIM of 4.66%, 20bps lower than FY21’s 4.86%. The guidance for lower FY22 NIM is premised on: i) further reversal in interest accrual in 1Q22 albeit significantly lower than 4Q21; and ii) the impact of regulatory increase in statutory reserve requirements on banks in Indonesia by 300bps on a staggered basis which will affect Niaga’s interest income by Rp50–70bil.

• Barring any further lockdowns impacting mobility restrictions and business operations, we expect higher loan growth and lower provisions for Niaga ahead. With the declining amount of LARs and Covid-19 restructured loans, we anticipate a decline in the top-up of provisions (management overlays). Loans that have graduated to resume their normal repayments could lead to some reversals in management overlays moving forward.

Source: AmInvest Research - 22 Feb 2022