• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM7.05/share. This is based on our estimated FY18 ROE of 10.5% leading to a P/BV of 1.3x.

• Niaga recorded a core net profit of Rp781bil (-4.4%QoQ, +35.6%YoY) in 4QFY17. This led to a 12MFY17 core earnings of Rp2.98tril (58.8%YoY), supported by modest growth in net interest income (NII), higher non-interest income (NOII) and lower provisions for loan losses.

• Niaga’s 12MFY17 operating income grew 5.6%YoY driven by higher NII (+2.6%YoY) and NOII (+18.8%YoY). The rise in NOII was driven by higher recoveries, income from fx and fixed income derivatives as well as a rise in bancassurance fees.

• 12MFY17 NIM declined to 5.60% compared to 5.64% in 12MFY16. On a quarterly basis, Niaga's NIM trended lower to 5.20% in 4QFY17 from 5.50% in 3QFY17. There continues to be pressure on Niaga's NIM. This has contributed by: i) the divestment of its micro laju business with higher yielding loans; 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. QoQ, Niaga's CASA grew slower than the industry. Meanwhile, the more costly time and structured deposits expanded at a faster pace than the industry.

• Loan growth continued to be modest at 2.8%YoY compared to the industry's 5.2%YoY. The expansion in its loan book was mainly contributed by growth in mortgage and SME loans at 12.0%YoY and 10.7%YoY respectively while corporate loans grew by 7.7%YoY. Its loan growth continued to be dragged by the contraction in auto loans of 41.1%YoY. This was to realign its auto business model which will continue into FY19. The recalibration of its auto loans has resulted its consumer loans to shrink by 6.7%YoY. Nevertheless, it is expected to improve its asset quality of its auto loan book.

• Growth in commercial and corporate loans picked up pace to 6.9%YoY and 7.7%YoY respectively while MSME loans expanded by 4.3%YoY.

• Syariah financing stayed strong with a growth of 63.5%YoY, supported by mortgage loans.

• Niaga's OPEX remained well-controlled with a growth of 2.1%YoY in 12MFY17. Advertising and promotion, general as well admin expenses declined YoY but were offset by higher personal cost. It recorded a positive JAW of 3.5% in 12MFY17 with a growth in operating income outpacing the rise in OPEX. 12MFY17 CI ratio improved to 47.7% vs. 49.4% in 12MFY16. Nevertheless, investments in technologies to facilitate greater digitalization of its banking services are expected raise its CI ratio in the coming quarters.

• Provisions declined by 10.3%QoQ in 4QFY17 and by 18.0%YoY for 12MFY17. Credit cost improved to 2.26% in 12MFY17within management's guidance of 2.00%-2.50% for FY17.

• Gross NPL ratio for Niaga fell to 3.75% from 3.95% in the previous quarter while GIL ratio improved 14bps QoQ to 5.10%. Auto loans’ NPL ratio declined to 1.3% while that of credit card lowered to 3.3% comparedto3.6% in the previous quarter. 4QFY17 saw NPL ratio for corporate improved further to 2.5% while commercial loans’ NPL ratio rose 20bps QoQ to 8.2%. NPL ratios for MSME remained stable at 3.5%. As for consumer banking loans, the NPL ratio improved 50bps QoQ to 2.5%.

• We continue to see a gradual improvement in the asset quality of Niaga. The percentage of Niaga’s special mention loans has fallen to 4.72% in 4QFY17 compared to 6.01% in 3QFY17.

Source: AmInvest Research - 27 Feb 2018