Results

CIMB  Niaga  posted  3QFY14  net profit  of  Rp343 bn  (- 59.9% qoq;  -68.2% yoy)  took  9MFY14 to Rp2,296 bn (-28.5% yoy), below  consensus  forecast  or  only  accounted  for  53.9%  of street estimate.

Deviation 

Mainly due to higher-than -expected provision as gross NPLs rose  to  3.35%  from  2.97%  in  2Q  while  the  company  also took preemptive meas ures to impaired most coal and coal related  loans  (under  IFRS139)  which  resulted  in  gross impaired  loans  jumped  to  5.37%  from  3.88%.   As  a  result, credit charge jumped to 125bps  vs . 71bps in 2Q and overall guidance  of 80-100bps.

Guiding  for  likely  increase  in  provision  in  coming  quarters due to potential rise in NPLs although impaired loans ratio is close to peak.

Highlights 

Weak  results  reflect  the  challenging  environment  in Indonesia.   Only  saving  grace  was  slight  improvement  in NIM  for  the  second  consecutive  quarter,  after  the  12bps sequential  drop  in  1Q.   Single- digit  growth  in  net  interest income was reflective of slow loans growth an d tight liquidity environment, albeit it was able to grow its CASA faster than overall deposits as a conscious effort to reduce expos ure to higher cost deposits. Decline in Non-interest income is also reflective  of  subdued  activities  as  well  as  the  change   in Banca fee structure (lower  premium  and lower  share).

It  expect  environment  to  remain  challenging  but  believe there  are  opportunities  once  the  new  government  set concrete policies.

Risks

• Unex pected  jump  in  impaired  loans,  lower  than  expected loan  growt h and impact on non -interest income if there is a slowdown  in capital markets .

Forecasts

• Unchanged  for  now pending CIMB Group’s  3QFY14  results tentatively  scheduled for  18 Nov .

Rating

Trading Buy

• Positives - Proxy to economic growth and capital mark ets 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  maintained  at  RM7.22  (Gordon  Growth  with ROE of 12.1% and WACC of 9.8%).

Despite  concerns  about  merger  dilution  and  duplication  as well  as  uncertainties  in  Indonesia,  we  believe  the  selldown to  recent  low  at  1.39x  FY14  book  has  been  over exaggerated.   Even  after  yesterday’s  rebound,  it  is  still trading at 1.44x FY14 book but now on par with RHB Cap as a  proxy  to  the  merged  entity.   Maintain  Trading  BUY  as values  emerged  amid uncertainties.

Source: Hong Leong Investment Bank Research - 30 Oct 2014