CIMB reported 1Q18 results that were below expectations due to higher marked-tomarket trading losses. Management has retained its guidance for a sequentially stronger 2H18 as loans growth gains momentum. However, we trim our earnings forecasts to factor in a more conservative fee income and NIM outlook This prompts us to trim our target price to RM7.40 (1.33x 2018F P/B, 10.2% ROE). Maintain BUY as sentiment-driven selldown has the stock trading at an attractive -1SD P/B and PE.

RESULTS

• Marginally below. The group’s 1Q18 core earnings, excluding a RM153.2m one-off gain from the stake disposal of CIMB Securities International of RM1,190.2m (+0.8% yoy and +12.2% qoq), were marginally below - representing 23% of our full-year estimate. This was attributed to lower trading income (-25.2% yoy) on the back of marked-to-market losses and forex translation impact on net interest income from its overseas operations.

• Cost-to-income ratio improved on the back of deconsolidation of CIMB Securities. Cost-to-income ratio improved 110bp yoy to 51.6% post deconsolidation of CIMB Securities International which led to a corresponding 6.7% yoy decline in opex.
• Non-interest income impacted by higher unrealised trading losses. Encouragingly, despite the deconsolidation of CIMB Securities brokerage revenue, overall fee income expanded 4.2% yoy on the back of strong commission income growth of 36.1% yoy. However, due to the weak trading income (-25.4% yoy) on higher marked- to-market losses on derivative instruments, overall non-interest income decline 7.9% yoy.
• NIM improved qoq on OPR hike but down yoy due to pressure from Niaga. NIM increased 4bp qoq, supported largely by the recent 25bp OPR hike. However, the 60bp contraction in CIMB Niaga’s NIM resulted in a 15bp yoy compression in group NIM. 2H18 compression should moderate downwards due to the base effect. As such, we are forecasting a lower full-year NIM compression of 6bp vs 1Q18’s -15bp.

• Taking a more conservative stance on fee income and NIM forecasts. The heightened capital market volatility and risk aversion post GE14 coupled with external developments could partially impact the execution of its investment banking pipeline, prompting us to tone down our fee income growth forecast for 2018/19 to 6%/7% respectively (previously: 9%/10% respectively (2017: +11%). In terms of NIM forecast, we have reduced our assumption by 2bp to factor in the potential headwinds from Bank Indonesia’s recent rate hike which could persist in the near to medium term as it seeks to stabilise the rupiah. Excess domestic liquidity in Indonesia coupled with competition for higher quality loans could place some pressure on NIMs with the transmission mechanism possibly favouring a faster upward re-pricing of deposits vs loans.

• Improving asset quality trend. Gross impaired loans (GIL) balance improved 4.4% qoq with the improvement coming from Indonesia (-14.4% qoq) while asset quality in Malaysia was broadly stable. Consequently, GIL ratio improved 20bp qoq to 3.2% in 1Q18. Credit cost declined to 49bp in 1Q18 from 71bp in 4Q17 on the back of improving asset quality trends in Indonesia. We are retaining our full-year forecast of 56bp vs management’s guidance of 50bp to 60bp.

• Impact of MFRS9. Day 1 adoption of MFRS9 resulted in a 28% yoy increase in provisions taken through the balance sheet via retained earnings which consequently led to a 70bp qoq decline in fully-loaded CET1 to 11.7% as its regulatory reserves were not sufficient to fully meet the higher provisions and BNM’s minimum impairment + provisions buffer equivalent to 1.0% of Stage 1 and Stage 2 loan exposure at default. Post adoption of MFRS9, the group’s loans loss coverage ratio has increased to 90.2% (105.3% inclusive of regulatory reserves) vs 70.5% and 84.1% in 4Q17. As expected, credit cost declined yoy despite the adoption of MFRS9 as CIMB Niaga’s provision continues to trend downwards from a high base.

• CET1 on schedule. Despite the 70bp negative impact on CET1 from MFRS9, the group is on schedule to meet its 12% CET1 target by end-18 given the CET1 level of 11.7% in 1Q18. Recall that the group’s initial target was to reach 11.5% by end-17, before the inclusion of the impact from MFRS9.

EARNINGS REVISION/RISK

• We have lowered our 2018/19/20 earnings forecasts by 4%/5%/5% respectively, factoring in more conservative fee income growth assumptions due to heightened capital market risk aversion and lower NIMs as Bank Indonesia’s recent rate hike stance to help stabilise the rupiah could place some pressure on CIMB Niaga’s NIMs.

VALUATIONS AND RECOMMENDATIONS

• Maintain BUY with lower Gordon Growth-derived target price of RM7.40 (1.33x 2018F P/B, 10.2% ROE) post earnings forecast revisions. Despite our earnings revision to price in a more conservative earnings outlook given the latest developments of a more volatile capital market environment and potentially weaker-than-expected NIM from CIMB Niaga, we believe that the selldown has been excessive with current valuations trading at -1SD on a P/BV and PE basis. The stock continues to trade at an attractive 10.3x 2018F PE (5-year historical mean of 13.3x) and 1.06x 2018F P/B vs historical mean of 1.20x.

Source: UOB Kay Hian Research - 31 May 2018