Results

• CIMB Niaga posted 1QFY15 net profit of Rp83bn (+80.4% qoq; -92.4% yoy) only accounted for 2.2% of street estimate.

Deviation

• This is not a surprise as the company has forewarned that 1Q results will be weak due to continued high provision (albeit lower provision qoq as guided) for the coal and related sectors. However…

Highlights

• … Niaga expects NPLs will remai n el evated with potential of further deterioration (from 4.07% in 1Q to maximum of 4.5% in 2Q). Thus, provision will remain elevated in 2Q (albeit lower qoq). It expect clearer situation to emerge by midyear. Gross NPL and impai red loans ratios deteriorated further in 1Q to 4.07% and 5.33% vs. 3.90% and 4.79% in 4QFY14, respectively. This is contrary to previous guidance of NPL peak in 1Q with marginal deterioration sequentially.

• Despite sequential improvement in earnings, it was mainly from lower provision. Continued loans growth and improvement in non-interest income (excluding sale of asset in 4QFY14) were more than offset by sharp contraction in NIM and 9.5% rise in overheads.

• It expects net interest income and non-interest income to continue growing. However, the growth will be marred by continued elevated provision, expected soft Indonesia economy in 1H15 and its continued efforts to change port folio mix to higher asset quality loans (with lower margin). The latter is expected to continue pressure NIM well into mid-2016.

Risks

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

Forecasts

• Unchanged, pendi ng CIMB Group’s 1QFY15 results scheduled for 20 May. Note that our ROE projection is in line with gui danc e but Niaga’s latest guidance on asset quality and provision is a negative surprise.

Rating

HOLD

Positives

• Proxy to economic growth and capital markets as well as growing regional universal bank platform, new core banking system (1Platform) and new T18 initiatives.

Negatives

• Impact on non-interest income when capital markets soften, impact of asset quality deterioration in Indonesia and legacy high cost structure.

Valuation

• Target price maintained at RM6.32 (Gordon Growth with ROE of 11.3% and WACC of 10%).
• While we remained positive about the spring cleaning and T18 (aggressive cost cutting) on longer term asset quality and business model, share price could be bogged by near term uncertainties in Indonesia and the recent sharp 23.6% rebound from low of RM5.05 in Jan 2015.

Source: Hong Leong Investment Bank Research - 23 Apr 2015