-  CIMB Group Holdings Bhd’s (CIMB) 97.9%-owned Indonesian subsidiary, PT Bank CIMB Niaga Tbk’s (CIMB Niaga) 2Q annualised net earnings was 24% below our forecasts, with a lower estimated earnings contribution to the group at 21% in 2QFY14 (1QFY14: 29%). The softer net earnings were due to higher funding costs, lower bancassurance fee income and higher loan loss provision.

-  Loans growth rate was sustained at 2.3% QoQ in 2Q (1QFY14: +2.5% QoQ) and 9.1% YoY, with the company hinting that it is maintaining a cautious stance after being slightly more positive in 1Q. The main change is the uncertain economic environment, as borrowers felt the full impact on high interest rates costs, high inflation, as well as added impact from slowdown in government spending leading to the general election.

-  Deposit growth was slightly better at 2.7% QoQ and 10.6% YoY, with growth mainly driven by CASA deposit (45% of total deposit, +4.4% QoQ, +12.0% YoY) led by earlier efforts to drive transactional banking deposits. Group LDR eased to 97.8% in 2QFY14 from 98.4% in 1QFY14.

-  NIM was better at 5.26% in 2QFY14, when compared to 5.22% in1QFY14, due partly to a 25bps re-pricing impact in the early part of 2Q as well as another 25bps toward the tail-end of 2Q in late June 2014. Other than that, the company alluded that costs of funds have generally moved up by 50bps to 75bps during the quarter. More importantly, it expects NIM to remain under pressure, given that time deposit rates have increased for the industry from 9% to 10.5% post June 2014.

-  The gross impaired loans ratio has increased to 3.9% in 2QFY14, from 3.1% in 1QFY14. Overall gross impaired loans balance climbed 28.5% QoQ, with the rise from the commercial segment this time (Note that earlier uptick in 1Q was from the corporate segment, which has stabilised). The new impaired loans came mainly from the oil and gas, power plant, and printing industries. This came partly from slower pre-payment verification process by the government, due to distraction caused by the general election.

-  The company hinted that some of these new impaired loans have strong collateral values, thus leading to relatively lower provisioning requirements. We estimate credit costs at 90bps in 2QFY14 (1QFY14: 51bps) but loan loss cover has declined to 66.1% in 2QFY14 (1QFY14: 82.0%) as the company remains comfortable with the newly impaired loans’ collaterals. Based on CIMB NIaga’s 2Q results, we expect some stabilisation in the 4Q at the earliest. Maintain HOLD. 

Source: AmeSecurities