Results

• CIMB Niaga (Niaga) started 1Q17 with higher net profit of Rp640bn (+138% YoY). QoQ basis, it was, however, down - 18.2%.

• Key highlights for 1Q17 results were (i) robust non-interest income (NOII) ii) lower allowance and iii) positive JAWS.

Deviation

• Strong earnings on YoY basis was underpinned by higher net-interest income (+9.1% YoY) and higher NOII (+11.7%).

Highlights

• Contraction in gross loan. Niaga’s loan fell by -2.3% QoQ to Rp175.9trn mainly due to slip in consumer (-1.9% QoQ), commercial banking (-1.1% QoQ) and corporate (-6.0% QoQ). In consumer banking, the rebalancing from auto loan continued (-11.3% QoQ) and in commercial banking, some of the accounts have been shifted into corporate segment resulting to the dip in gross loan.

• Weak asset quality. Gross NPL ratio weakened to 3.91% from 3.89% in 4Q16 mainly due to uptick in MSME (3.7%) and consumer segment (3.0%). In consumer segment, the weakness emanated from credit card segment. Management sees risk of deterioration to the asset quality despite impaired loan ratio improving to 5.07%. Nevertheless, the special mention loans category continued to improve, with a drop of 60bps QoQ to 6%.

• Dip in NIM. NIM moderated by 20bps to 5.71% attributed to a decline in CASA growth by -2.2% QoQ amid repayment of Rp4trn of loan which we believe is high yield in nature. For FY17, management guided for NIM compression to a more sustainable level around ~5%.

• Improved provision. Loan loss provisioning improved to Rp996m but remained elevated compared to Rp1.04trn in 4Q16. This is in line with market expectations. Due to subdued economic sentiment, 220-250bps of credit cost guidance was maintained.

• Positive JAWS . Despite a rise in personnel cost by 7% QoQ, opex still registered positive JAWS due to higher income reported. Cost-to-income ratio was in line with expectations at 49.13%.

Risks

• Further impairment in Singapore and Thailand, especially exposure in the oil & gas sector and not meeting CET1 ratio target.

Forecasts

• Unchanged.

Rating

HOLD ( ↔ )

• We opine that FY17 will be a year of further tweaking of business operation with priority of cost and capital optimization. Management’s guidance for a sustainable 40%-60% payout should entice the shareholders moving forward.

Valuation

• We maintain our HOLD rating on CIMB with unchanged TP of RM5.60 based on Gordon Growth model (ROE 9.3% and WACC of 9.4%).

Source: Hong Leong Investment Bank Research - 28 Apr 2017