• We maintain our HOLD recommendation on CIMB Group with a lower fair value of RM6.60/share (previously: RM6.70/share). This is based on a slight decline in our estimated FY18 ROE to 10.3% vs. 10.4% earlier, leading to a P/BV of 1.2x. We have fine tuned our FY17/18/19 net profit by -0.1%/-0.5%/-0.6% respectively after trimming our loan growth assumption to 6.0% from 7.0% for FY17. This is in view of the slow loan momentum of its subsidiaries, PT Bank CIMB NiagaTbk (Niaga) and CIMB Thai.

• Niaga recorded a net profit of Rp817bil (+10.4%QoQ, +45.1%YoY) in 3QFY17. This led to a 9MFY17 earnings of Rp2.2tril, which grew 69.1%YoY, supported by higher net interest income (NII), rise in non-interest income (NOII) and lower provisions.

• Niaga’s 9MFY17 operating income grew 5.1%YoY driven by higher NII (+5.4%YoY) and stronger contribution from NOII in 3QFY17. 9MFY17 NIM rose by 20bps YoY to 5.74%, underpinned by a strong CASA ratio of 53.3% and active management of its assets and liabilities. Nevertheless, on quarterly basis, Niaga's NIM trended lower to 5.50% in 3QFY17 from 6.05% in 2QFY17. This was contributed by: i) the divestment of its micro laju business with higher yielding loans in 3QFY17, ii) higher growth of the more costly time and structured deposits which improved its liquidity and iii) faster pace of downward repricing in loans compared to deposit rates as a result of BI rate cuts. Recently, BI has cut interest rates in Indonesia twice and we understand that this has caused Niaga's loan pricing to be under pressure with borrowers demanding lower rates for loans. NIM pressure is expected to continue and management is maintaining its guidance for Niaga's NIM to converge to 5.00% by end of FY17.

• Recall in 2QFY17, Niaga's current account deposits have contracted due to the Lebaran (Hari Raya Aidilfitri) holidays. In 3QFY17, its current account deposits have risen back again with a positive growth.

• 9MFY17 saw Niaga's NOII rising by 3.6%YoY, underpinned by recovery and higher fees and commissions. In 3QFY17, Niaga reported a strong improvement in NOII by 32.3%QoQ. This was supported by higher recovery, income from FX and fixed income derivatives and rise in fees and commission.

• Loan growth continued to be modest at 2.7%YoY compared to the industry's growth of 6.6%YoY. It continued to be below its target of a high single-digit loan growth for FY17. Compared to the preceding quarter, Niaga's mortgage and SME loans expanded at a faster pace of 12.1%YoY and 14.5%YoY respectively. Its loan growth continued to be dragged by the contraction in auto loans of -38.9%YoY. The shrinkage of its auto loans is likely to continue until the end of 2018. Niaga has tightened the underwriting of its auto loans. Also, it has been recalibrating its auto loan portfolio. Excluding the decline in auto loans, its loans growth would be higher at 6.6%YoY, in line with industry trend.

• Consumer loan growth remained soft at -6.2%YoY, dragged by the decline in auto loans. Meanwhile, growth in outstanding of credit cards continued to soften to 3.1%YoY.

• Growth in commercial loans accelerated to 6.2%YoY with a stronger loan momentum for working capital financing. On the flipside, corporate banking loans grew at a slower rate of 6.3%YoY.

• Syariah financing stayed strong with a growth of 82.5%YoY, supported by mortgage loans.

• Niaga's OPEX remained well-controlled with a marginal growth of 0.8%YoY in 9MFY17. It recorded a positive JAW of 4.3% in 9MFY17 with a growth in operating income outpacing the rise in OPEX. 9MFY17 CI ratio improved to 47.8% vs. 49.8% in 9MFY16. Nevertheless, investments in technologies to facilitate greater digitization of its banking services will raise its CI ratio in the coming quarters.

• Provisions declined by 1.9%QoQ in 3QFY17 and by 16.4%YoY for 9MFY17. Credit cost remain elevated but has improved to 2.34% in 9MFY17 within management's guidance of 2.00%-2.50% for FY17. The elevated level for its credit cost is likely to continue in the near term as economic conditions remain soft in Indonesia. Niaga's credit cost is only likely to improve gradually moving into FY18.

• Gross NPL ratio for Niaga rose slightly to 3.95% from 3.89% in the previous quarter while GIL ratio climbed 23bps QoQ to 5.24%. Auto loans NPL ratio improved to 3.0% while that of credit card was stable at 3.6%. 3QFY17 saw NPL ratio for corporate and commercial loans rising to 2.8% and 8.0% respectively while the NPL ratios for both MSME and consumer banking loans were stable. There remain challenges in managing its asset quality in Indonesia.

• The uptick in the percentage of Niaga’s special mention loans to 7.17% 2QFY17, contributed by slower repayments has improved in 3QFY17. In 3QFY17, the percentage fell to 6.01%.

Source: AmInvest Research - 1 Nov 2017