Highlights

Despite industry-wide rise in Indonesia delinquencies, CIMB Niaga’s asset quality remained intact given that the group had already turned cautious in late 2012 (which resulted in tighter risk management as well as slower than industry loans growth). With terms and rates now more palatable, it is keeping its 15% loans growth for FY14 (with major driver coming from the corporate segment).

Although Niaga has no liquidity issue, intense competition, especially for deposits, will be the main source of margin compression. However, NIM contraction is only expected to be 20-30bps vis-à-vis 53bps in FY13.

This would translate into 5-15bps NIM compression for the group as margin in other home countries expected to be stable. Despite intense competition, it expects NIM to hold given CASA growth traction, digital banking and the recent hike in HP rate.

RBS still expected to breakeven in FY14.

Overall overhead is expected to be well contained after FY13’s MSS.

Asset quality remains intact with no signs of danger while the group is not overly exposed to consumer segments that are vulnerable to higher living costs. Nevertheless, it continues monitor the situation closely while provisioning is expected to be slightly higher due to lower recovery.

As for its capital management, a lot will depend on Rupiah movement, the outcome of its work on RWA, whether it is able to utilize current buffer in regulatory reserve (which is excluded in CET1 and Tier-1 calculation). The latter could boost its capital ratio by circa 50bps. Higher capital ratio could result in flexibility in dividend policy (now at the lower end of its 40-60% range) and discount pricing of its dividend reinvestment scheme.

Catalysts

Gaining more traction in cost rationalization, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

Unchanged.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform and the new core banking system (1Platform).

Negatives – Impact on non-interest income if capital markets soften and impact on asset quality from higher Indonesia interest rate.

Valuation

Target price maintained at RM7.74 based on Gordon Growth with ROE of 13.7% and WACC of 10.5%.

Source: Hong Leong Investment Bank Research - 28 Apr 2014