• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM7.10/share. This is based on our FY18 ROE of 10.5% leading to a P/BV of 1.3x.

• For 1QFY18, Niaga reported a net profit of Rp877bil (+12.3%QoQ, +37.0%YoY). On a year-on-year basis, the improved earnings were attributed to a higher noninterest income (NOII) by 38.5%YoY largely from recovery income and forex and fixed income derivatives as well as lower provisions, partially offset by higher operating expenses (OPEX).

• Net interest income (NII) for its Indonesian subsidiary in 1QFY18 was flat, driven by a lower NIM of 5.10% (4QFY17:5.60% 1QFY17: 5.71%) and subdued loan growth. NIM has moved towards management’s guidance of 5.00% for FY18 and is expected to remain under pressure due to lower asset yield as a result of the recalibration of its loan book towards better quality borrowers as well as competition for loan pricing. This was evidenced in mortgage loans with the rates for mortgages declining to 5.8% from 7.0% a year ago. Despite this, Niaga will still continue to grow its mortgage book on cross-selling opportunities for the other products such as bancassurance and credit cards. We understand from the management that there is also pressure In lending rates for SME and corporate loans.

• Niaga's CASA ratio was stable at 55.04%. CASA grew 7.4%YoY with a stronger growth in savings compared to current account deposits which benefitted from the digital banking offerings for the SME and consumer segments.

• Loan growth was flat at 1.8%YoY compared to the industry's 6.7%YoY. This was largely dragged by the contraction in auto loans. Excluding auto loans, loan growth for Niaga was close to 6.0%YoY. Nevertheless, its loan growth is likely to pick up pace in 2HFY18 with the disbursements of its loans for financing of infrastructure.

• Niaga’s consumer loans contracted by 6.0%YoY dampened by auto loans which slipped 39.6%YoY. This was due to the recalibration of its auto loan book to improve the segment’s asset quality. Growth in MSME loans was subdued. Meanwhile, commercial and corporate loans grew by 4.9%YoY and 7.3%YoY respectively, contributed by the expansion in working capital loans. Elsewhere, syariah financing remained strong with a growth of 58.5%YoY, supported by mortgage loans.

• Niaga's OPEX grew by 4.4%YoY. Niaga continued to record a positive JAW (1.2%) in 1QFY18. 1QFY18 CI ratio improved to 48.6% vs. 49.13% in 1QFY17. We continue to expect investments in technologies to facilitate greater digitalization of its banking services to raise its CI ratio in the coming quarters.

• Provisions declined by 7.9%QoQ and 21.2%YoY in 1QFY18. Credit cost improved to 1.79% in 1QFY18 (1QFY17: 2.31%) which is within management's guidance of 1.50%-2.00% for FY18.

• Gross NPL ratio for Niaga drop to 3.51% from 3.75% in the previous quarter contributed by recoveries, improved loan portfolio quality from its focus on higher quality borrowers and disposal of assets. Meanwhile, GIL ratio improved 49bps QoQ to 4.61%. Auto loans NPL ratio has improved to 1.3% due to its recalibration of its loans in that segment while that of credit card and mortgage loans have been stable QoQ. 1QFY18 saw NPL ratio for corporate improving further to 1.9% while commercial loans NPL ratio rose 60bps QoQ to 8.8 % with weakness in the loans to the property, manufacturing and logistics sectors. NPL ratio for MSME improved to 3.0% while that for consumer banking loans remained stable at 2.5%.

• We continue to see a gradual improvement in the asset quality of Niaga while its loan growth is expected to trend higher ahead with the disbursement of loans for infrastructure and the completion of the recalibration of auto loans by the end of 2018.

Source: AmInvest Research - 26 Apr 2018