• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM6.70/share. Our fair value is based on FY18 P/BV of 1.2x on the back of an ROE of 10.4%. We keep our forecasts unchanged for now.

• CIMB Group Holdings Bhd (CIMB) 93.7%-owned subsidiary, CIMB Thai reported a lower net profit of THB77mil (or RM9.7mil) in 3QFY17 (-78.5%QoQ), dragged by higher provisions and operating expenses (OPEX). Further allowance for loan losses has been provided for the same SME loan accounts related to the commodities sector. We understand that these loans have already turned impaired/NPL. Provisions are likely to the continue to dampen CIMB Thai's earnings leading toa weak 4QFY17. We continue to expect CIMB Thai to record improved earnings in FY17 compared to a loss of THB630mil in FY16 which was impacted by substantially high provisions in 4QFY16. Nevertheless, the contribution of CIMB Thai's earnings to group's profits for FY17 will remain insignificant (< 5.0%).

• CIMB Thai registered a cumulative net profit of THB554mil or RM70.7mil (-30.5%YoY) for 9MFY17. 9MFY17 total income grew marginally by 1.5%YoY, but was offset by higher provisions due to an increase in NPLs and rise in OPEX.

• OPEX grew by 2.3%YoY contributed by one-off business rationalisation expenses in closing down its branches as well as credit cards business in Thailand. This led to a higher CI ratio for CIMB Thai of 55.2% in 9MFY17 vs. 54.8% in 9MFY16. Excluding the one-off expenses, 9MFY17 CI ratio would be lower at 54.4%, a slight improvement of 40bps YoY.

• Provisions increased by 16.5%QoQ to THB2.0bil in 3QFY17. This resulted in a higher credit cost of 2.5% in 3QFY17, up from 2.2% in 2QFY17. For 9MFY17, its credit cost was 3.5%, higher than 3.2% in 9MFY16. We expect provisions to remain elevated in the near term. This is due to the weakness in the asset quality of CIMB Thai's SME loans.

• CIMB Thai's NPL ratio rose to 5.7%. Its loan loss cover was 85.1% as at the end of 9MFY17. The Thai subsidiary's loan-to-deposit ratio stood at 123.0% as at end- 9MFY17 while its modified LD ratio was 99.4%. Gross loan growth for CIMB Thai continued to be subdued at +1.1%YoY in 9MFY17, lagging behind its target of 5-10% for FY17.

• 9MFY17 NIM saw an improvement to 3.88% (9MFY16: 3.76%) due to a more efficient management of funding cost.

• For 9MFY17, non-interest income (NOII) slipped 5.2%YoY. This was due to lower gains on trading, FX transactions and investments which offset an increase in net fee and service income. 9MFY17 net service fee and income grew 21.0%YoY, underpinned by higher advisory, mutual funds and hire purchase fees.

• We met the management of CIMB Group yesterday for some updates. The group is on track to meet all of its FY17 KPI targets with the exception of loan growth.We understand that Malaysia's loan growth has been tracking close to the group's targets while that of the overseas operations (Indonesia, Thailand and Singapore) has been slow and behind targets. Hence, the group's loan growth target of 7.0%YoY for FY17 is likely to be challenging.

• In Indonesia, the group continued to be well behind with targeted growth of a mid-tohigh single-digit for FY17 with the recalibration of its auto loans and contraction in micro laju loans. Meanwhile, in Thailand, the decline of its SME loans has contributed to a flattish loan growth.

• We understand that in 3QFY17, the execution of IB deals has improved. This is likely to lead to an increase in NOII compared to the preceding quarter.

• On the uptick in provisions in Malaysia's loans observed in 2QFY17 due to the festive season, we understand that this has already normalised. In Indonesia, provisions are likely to gradually decline while in Singapore, there is still weakness in the asset quality of oil & gas sector loans which could still result in more provisions in 3QFY17 and 4QFY17 but on smaller quantum compared to 2QFY17. On a comforting note, the outstanding loans to the oil & gas sector remained small, standing at circa S$300mil.

• Management continued to guide for an early assessment impact of a 50bps drop on its CET1 ratio with its regulatory reserves being allowed to offset against the higher provisions under MFRS 9. It hinted of a higher possibility for the regulatory reserves to be allowed to knock off against the increase in provisions under the new accounting standard.

• The group is now guiding for its NIM in FY17 to be flat as compared to contraction of 5 to 10bps in FY17 earlier. We understand NIMs in Thailand and Malaysia have been stable while that in Indonesia has slipped due to lower asset yield. In Singapore, we gather its NIM has improved.

• The group's disposal of its 18.21% stake in Bank of Yingkou is expected to be completed by 4QFY17.

• CIMB Niaga and group's results are scheduled to be released on 31 October and 21 November respectively.

Source: AmInvest Research - 20 Oct 2017