Results

CIMB Niaga posted 2QFY14 net profit of Rp855bn (-22.1% qoq; -20.8% yoy) took 1HFY14 to Rp1,953bn (-8.5% yoy), below our and consensus forecasts.

Deviation

Mainly due to higher-than-expected provision (sharp deterioration in asset quality) and to some extend lower fee income from slower demand.

Highlights

Loans growth 2.3% qoq and 9.1% yoy slower vs. 1QFY14’s 2.5% qoq and 9.5% yoy vis-à-vis industry average of 2.9% qoq and 15% yoy. Main drivers weres corporate and SME while marked slowdown in consumer. Growth likely to remain at current level if no change in macro.

Deposits growth was 2.7% qoq and 10.6% yoy, taking LDR from 98.4% in 1QFY14 to 97.8%. However, CASA grew 12% yoy. Will continue to focus on digital banking to build CASA momentum. US$ book (20% of total loan book) still low LDR (at 75% vs. 67%) which will be the driver for corporate loans and help to protect NIM.

2Q NIM improved 2bps qoq but declined 2bps yoy. Tight liquidity still prevails, thus, expect continued pressure on NIM. Moreover, market rate for time deposits has increased 50-75bps while it is only re-pricing loans with 50bps hike (half in 2Q and half in Jun).

2Q non-interest income -23.3% and -14.6% yoy due to lower new banca tariff and demand. Overhead contained at 1.5% qoq and 7.6% yoy due to inflation pressure.

Provision 81.6% qoq and 98.4% yoy due to sharp jump in NPL to 2.97% (credit charge 71bps) from 2.57% (52bps) in 1Q14 and 2.25% (64 bps) in 2Q13 mainly due to the commercial segment while other segments were stable. Impaired loans ratio and special mention loan also deteriorated. However, while these ratios may still inch up, they are close or near peak. Credit cost guidance is 80- 100bps, thus, provision will continue to hog earnings.

Overall, still very challenging environment despite conclusion of election given that the new government will take time to form while significant pro-growth policy (if any) is only expected by 4Q the earliest. Thus, management expects any improvement will only come in 4Q the earliest.

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 2QFY14 results in Aug but subject to downside bias revision.

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 as well as very challenging environment in Indonesia.

Valuation

Target price remained at RM7.74 (Gordon Growth with ROE of 13.7% and WACC of 10.5%). Although total potential return is >10%, maintain Hold rating as uncertainties in Indonesia to continue hog price in short-term.

Source: Hong Leong Investment Bank Research - 25 Jul 2014