• We maintain our BUY recommendation on CIMB Group with an unchanged fair value of RM6.80/share as valuation on the stock remains compelling, trading at 1.0x FY19 P/BV. Our fair value is supported by an FY19 ROE of 10.8%, leading to a P/BV of 1.2x. CIMB Group is scheduled to release its 2QFY18 results on 29 August and we make no changes to our estimates for now.

• For 2QFY18, Niaga reported a subdued growth in net profit of Rp891bil (+1.6%QoQ) with a lower operating income partially offset by improvement in operating expenses (OPEX) and lower provisions. Niaga’s 1HFY18 earnings increased by 28.1%YoY to Rp1.76tril. This was largely attributed to higher noninterest income (NOII) of 32.6%YoY underpinned by an increase in recovery income, FX gains and fee income coupled with lower provisions. Asset quality is seen to be improving, benefitting from the realignment of its auto loan book and the tilt of its corporate loans towards better quality borrowers.

• Net interest income (NII) for its Indonesian subsidiary in 1HFY18 fell 5.4%YoY contributed by the compression in NIM. NIM declined to 5.09% in 1HFY18 compared to 5.87% in 1HFY17 due to pressure on asset yield and funding cost. The recent increase in interest rates by 100bps in Indonesia in 2QFY18 to defend the Indonesian rupiah after the US Fed rate increase has resulted in an immediate reprising of deposits rates upwards while the changes to the loan rates lagged, adjusting only later. This has contributed to the rise in funding cost. Nevertheless, Niaga was able to partially offset this pressure with a strong growth in CASA of 12.8%YoY (above the industry’s 9.1%YoY) resulting in its NIM dropping marginally to 5.09% in 1HFY18 vs. 5.10% in 1QFY18. Niaga’s CASA ratio climbed to 56.12% in 1HFY18. Management is still hopeful of keeping its NIM at 5.00% for FY18 with the repricing of its loan rates up in 3QFY18 after Indonesia’s recent 100bps interest hike. We understand from the management that the 100bps increase in interest rates will not be passed down to its borrower in full in 3QFY18, and the pace of a full passthrough of the higher funding cost will depend on the type of segment/business of the borrowers. We see the need to balance the quantum of the rate hike to be passed through and the preservation of the group’s asset quality. This is particularly so for the segments or businesses which are sensitive to substantial rate increase with the soft and volatile conditions in Indonesia. This, coupled with the tightening of liquidity in Indonesia in our view, will result in challenges for Niaga to hold on to its NIM guidance of 5.00% for FY18. Looking ahead, the possibility of 2 more rate hikes in 2HFY18 (one in 3QFY18 and another in 4QFY18) in Indonesia is likely to put further pressure on Niaga’s NIM.

• Loan growth remained modest at 3.0%YoY in 1HFY18 compared to the industry's 8.6%YoY. This was largely dragged by contraction in auto loans. Excluding auto loans, loan growth for Niaga was close to 6.0%YoY

• Niaga’s commercial and corporate loans grew by 5.7%YoY and 8.8%YoY respectively contributed by the expansion in working capital loans. Elsewhere, syariah financing remained strong with a growth of 56.4%YoY.

• Niaga’s consumer loans contracted by 5.0%YoY, dragged by auto loans which slipped by 37.3%YoY. This was due to the recalibration of its auto loan book to improve the segment’s asset quality. On the consumer front, only mortgage loans grew positively by 8.9%YoY while growth in unsecured business (mainly credit cards and personal loans) was subdued. Growth in MSME loans remained flat due to repayments of micro linkage loans.

• Management hinted that its loan growth is likely to pick up pace in 2HFY18 with the disbursements of its loans for financing of infrastructure from the pipeline that had already been built up earlier. Management is targeting for a mid-single digit loan growth for FY18. In our view, loan growth in Indonesia will remain challenging in the near term. This is in view of the upcoming campaign presidential election campaign in 2HFY18 leading into the actual elections in April 2019. This may result in borrowers turning more conservative, adopting the wait-and-see mode until the outcome of the elections.

• Meanwhile, Niaga's OPEX grew by 3.4%YoY in 1HFY18. We believe that has been contributed by investments in technologies to facilitate greater digitalization of its banking services. Against an operating income growth of 1.5%YoY, Niaga recorded a negative JAW of 1.9% in 1HFY18. 1HFY18 CI ratio rose slightly to 49.4% vs. 48.5% in 1HFY17.

• Provisions declined by 27.1%YoY in 1HFY18. Credit cost improved to 1.67% in 1HFY18 (1HFY17: 2.35%) and was within management's guidance of 1.50%-2.00% for FY18.

• Gross NPL ratio for Niaga improved to 3.39% in 1HFY18 from 3.89% in 1HFY17 contributed by recoveries and improved loan portfolio quality from its focus on higher quality borrowers. Meanwhile, GIL ratio declined 65bps to 4.36% in 1HFY18. 2QFY18 saw its NPL ratio for corporate loans declining further to 1.1% while commercial loans’ NPL ratio rose 50bps QoQ to 9.3%. NPL ratio for MSME loans rose 20bps QoQ to 3.2% while that for consumer banking loans remained stable at 2.6%. Except for yje NPL ratio for mortgage loans which rose 30bps QoQ to 2.8%, NPL ratios for auto loans and unsecured loans remained stable. 2QFY18 saw the percentage of loans classified as special mention rising to 6.14% from 5.59% in the preceding quarter contributed by the Lebaran holidays. Niaga’s CAR ratio fell to 18.57%, a drop of 30bps QoQ in 2QFY18 due to dividend payments.

• Separately, BNM has approved the sale of CIMB Group’s Malaysia cash equities business and 100% stake in CIMB Futures to Jupiter Securities. This would subsequently see the formation of a new JV company that will be 50% owned by CIMB Group and the remaining by China Galaxy as the holding company of Jupiter Securities for the operation of the equities business in Malaysia. Meanwhile, the international stockbroking business has already been operated under CIMB Securities International, an entity 50:50 owned by CIMB Group and China Galaxy.

Source: AmInvest Research - 15 Aug 2018