• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.80/share. Our fair value is based on an FY19 P/BV of 1.2x, supported by an ROE of 10.8%. No change to our estimates for CIMB Group.

• CIMB Group Holdings 93.7%-owned subsidiary CIMB Thai released its 2QFY18 results with a higher net profit of THB191mil (or RM23.2mil), an increase of 13.2%QoQ. 1HFY18 net profit of CIMB Thai fell 24.6%YoY to THB360mil (RM43.8mil), largely due to higher operating expenses which offset an improvement in total income.

• The Thai subsidiary continued to report a negative JAW in 1HFY18. Total income growth of 6.5%YoY was lower than its OPEX growth of 13.3%YoY. The increase in OPEX was attributed to higher personnel cost and losses on the sale of properties. This led to a higher CI ratio for CIMB Thai of 57.0% in 1HFY18 vs. 53.6% in 1HFY17.

• CIMB Thai’s provisions remain at an elevated level. In 1HFY18, provisions rose by 1.0%YoY to THB2.39bil. Nevertheless, credit cost for CIMB Thai shrank to 2.16% in 1HFY18 vs. 2.27% in 1HFY17 on a higher loan base from an expansion in credits.

• CIMB Thai's NPL ratio continued to climb to 5.8% from 5.2% in 1QFY18 and 4.8% in 4QFY17. The increase was attributed to NPLs of commercial banking loans. Compared to 4QFY17, the rise in the ratio in 2QFY18 was contributed by the absence of sale of NPLs. This has resulted in the subsidiary’s loan loss cover to drop further to 90.1% from 92.3% in 1QFY18 and 93.2% in 4QFY17. 2QFY18 saw a higher loan to deposit ratio of 126.4% for CIMB Thai while its modified LD ratio fell slightly to 95.9%.

• Gross loan growth for the Thai subsidiary picked up pace to 6.3%YoY (1QFY18: 5.1%YoY). On QoQ basis, CIMB Thai’s loans on gross basis grew 2.2%.

• NIM expanded 6bps YoY to 3.87% in 1HFY18. This was due to a more efficient management of funding cost. In the recent MPC meeting on 20 June 2018, the Bank of Thailand has maintained the policy rate at 1.5%. This was despite the depreciation of the Thai baht against the USD and higher government bond yields due to the monetary tightening in the US. Other countries in the emerging market had similar experience, with their currencies depreciating against the USD. While the Philippines, Indonesia, India and Malaysia have raised interest rates this year, Thailand has maintained its benchmark rate. We expect Thailand to still be able keep the policy rate unchanged in 2HFY18 given its low core inflation rate while its FX reserves are still in the healthy state, and much higher compared to Indonesia. Indonesia’s FX reserves depleted substantially from the beginning of 2018 which has resulted in the need to raised the benchmark interest rates by 100bps this year to defend its currency.

• For 1HFY18, NOII expanded by 10.9%YoY. This was due to an improvement in net fee and service income by 10.0%YoY underpinned by higher fees from insurance, hirepurchase and mutual funds. Also, contributed to the increase were gains in financial liabilities.

Source: AmInvest Research - 20 Jul 2018