Results

CIMB Niaga posted 1QFY14 net profit of Rp1,054bn (+2.6% qoq; +4.2% yoy), in line with our and consensus forecasts.

Deviation

Largely in line.

Highlights

Loans growth of 2.5% qoq and 9.5% yoy was an improvement from 4QFY13 which was at 1% qoq and 8% yoy vis-à-vis industry average of -0.8% qoq and 18% yoy. Expect conditions to remain tough in 1H but to improve in 2H (after election). Positive signs from corporate lending (which the company has previously mentioned to be the main driver for its target loans growth of 15% in FY14).

Deposits growth was -1.4% qoq and -3.5% yoy due to intense competition and tight liquidity, taking LDR from 94.5% in 4QFY13 to 98.4%. However, CASA grew 6.4% yoy (ex one-off corporate placement in 1Q13). The bank will be focusing on digital banking to build CASA momentum.

1Q NIM improved 8bps yoy but declined 12bps qoq, maintain expectations of 20-30bps erosion for the year.

Non-interest income -0.19% and 2.2% yoy due to its insurance arm from slowdown in HP and capping of commission. Overhead 3.9% qoq and 9.7% yoy due to inflation pressure, CIR 50.2% but target to contain <50%.

Provision -43.9% qoq and -29.7% yoy to Rp201bn (vs. normal run rate of Rp280-300bn per quarter) due to writeback of corporate accounts. NPL deteriorated to 2.57% from 2.23% in 4Q13 while special mention loan also increase. However, these were distorted by long holiday weekend in Mar. Moreover, it has already made provision in 4Q13 and impaired loans ratio improved to 3.09% from 3.21% in 4Q13 while NPL is lagging.

Overall, still a challenging year in FY14, despite improved conditions (positive signs in corporate lending) as liquidity remained tight. This is expected to hog the group’s share price performance in the short to medium term given Niaga’s sizeable (circa 1/3) earnings contributions to group.

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 for now pending CIMB Group’s 1QFY14 results to be released tentatively on 21 May.

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- 30 Apr 2014