- CIMB Group Holdings Bhd’s (CIMB) 97.9%-owned Indonesian subsidiary, PT Bank CIMB Niaga Tbk’s (CIMB Niaga) posted a much lower net earnings in 3QFY14 (-59.9% QoQ, -68.2% YoY), mainly on slower fee income, and a spike in loan loss provision. Annualised net earnings worked out to be 45% below our forecasts, with net earnings contribution sliced to 8.6% of group net earnings in 3QFY14 (based on our forecasts) from 21% in 2QFY14.

- The gross impaired loans ratio rose to 5.37% in 3Q, from 3.88% in 2QFY14. We estimate the gross impaired loan’s absolute amount to have increased by 40% QoQ to Rp9.0bil by end-3Q from an estimated Rp3.9bil in end-2Q. On a more positive note, the big increase partly came from a proactive stance to impair loans related to the coal and coal-related segment, given the drop in coal prices.

- We estimate credit costs to have risen to 227bps in 3Q, from 90bps in 2Q and 51bps in 1Q. Credit costs have thus turned in higher than the earlier target of 80bps-100bps. The loan loss cover for the impaired loans has softened to 51.8% in 3Q, from 66.1% in 2Q.

- The company indicated that it is hopeful of the impaired loans trend having peaked, although it hinted that loan loss provision may increase to raise back the loan loss cover buffer.

- Loans growth was muted, but this was offset by good improvement in net interest margin (NIM) of 6bps QoQ to 5.32% in 3Q. The improvement partly came from the repricing of loans, and strategic shrinkage of its more expensive time deposits. The regulators have placed a cap on time deposit at 9.75% for the mid-range banks, including CIMB Niaga, effective 1 October 2014 (9.50% for the big four banks), which is positive for NIM ahead. There is caution though that NIM may remain under pressure given the chase by the industry for good quality loans, as well as the regulator’s intention for the cap in time deposit rates to be passed on to borrowers eventually.

- The company expects near-term challenges, with a likely increase in loan loss provision ahead and some pressure on NIM. Otherwise, the company has experienced good pipeline in corporate and commercial loans. All in, CIMB Niaga’s net earnings are below our expectations mainly due to the loan loss provision. In addition, judging from the latest results trend, we now expect signs of stabilisation to most likely emerge earliest in 1QFY15, instead of 4QFY14. Maintain HOLD.

Source: AmeSecurities