CIMB Niaga reported an improved 2QFY21 net profit of Rp1.12tln (+70.8% YoY, + 18.2% QoQ) due primarily to lower levels of loan loss provisions (-29.6% YoY, - 28.4% QoQ). Notable improvements continued to be seen in its funding profile, thereby sustaining its margins, while operating costs were also kept in check. Loans growth is still soft amid uncertain economic conditions, though key indicators continue to show positive trends. In the near-term, liquidity, asset quality and cost management will remain key focus areas. We remain optimistic over the Group’s longer-term prospects, underpinned by its F23+ initiatives, and are encouraged by this turnaround in the Indonesian operations. We retain our Neutral call however given limited upside to our target price of RM4.50.

• Operating income fell 2.4% QoQ due to a weakening in non-interest income contributions (-8.5% QoQ), though mitigated again by a notably lower interest expense (-8.0%). Loan yields were 4bps lower QoQ to 8.4% while cost of funds only slipped 2bps QoQ to 2.1%. There was a significant +141.8% QoQ jump in recoveries (from a sale of loans), though a much larger decline in derivative and fee income weighed on non-interest income.

• Net interest margin (NIM) slipped marginally to 5.08% in 2QFY21 (1QFY21: 5.12%) due to a drop in loan yields. On a YoY basis however, a significant improvement in funding costs (-124bps) which outstripped that of lower loan yields (-109bps) is keeping margins steady at above 5%. The bank’s CASA ratio of 62.4% is above industry average of 59.4%.

• Loans outstanding contracted further by 6.8% on a YoY basis, though relatively flat on a sequential basis. Caution continued to be exercised over the corporate (-14.0% YoY) and commercial (-14.3%) portfolios which continued to be restructured in line with its F23+ recalibration. With near to medium term focus still on asset quality management, the consumer banking franchise will remain the growth driver, particularly in the mortgage and auto segments.

• Asset quality continues to improve, with loan loss provisions dropping a further 29.6% YoY and 28.4% QoQ though also due in part to absorption by macro overlays from previous quarters. Gross non-performing dropped 0.6% QoQ to 3.2%, though special mention loans were 0.5% higher to 6.6%. Management is cautious given the resurgence in new COVID-19 cases, with the resultant movement restrictions and business closures posing new challenges. Active loans at risk (including COVID-19 related credit) currently makes up about ~18% of its total loans book, with a 39% coverage ratio. 1HQFY21 credit cost is 2.7%, within expectations.

Source: PublicInvest Research - 2 Aug 2021