Niaga 1Q18 net profits of Rp877bn (+13% QoQ, +37% YoY) was in line with consensus expectations. Stronger earnings were attributed to higher non interest income and sharply lower provisions, but partly offset by weaker loan growth and NIM. Asset quality, on the other hand, continues to improve. Our forecast on CIMB is unchanged and we maintain our BUY rating with unchanged TP of RM7.90 (COE: 10%, WACC: 8.7%).

Stronger results. Niaga’s reported 1Q18 net profit of Rp877bn (+12.5% QoQ, +36.9% YoY) was in line with consensus expectations. Key drivers to the strong 1Q18 earnings include improved non-interest income (+38.5% YoY) and sharply lower provisions (-21.2% YoY).

1 st dividend in 6 years – a pleasant surprise. Niaga approved dividend for the first time in 6 years, with 20% payout ratio during the recent AGM. This reflects management’s confidence in Niaga’s earnings recovery.

Loan growth. Niaga’s loan growth was still weak due to a change in loan mix. Loan growth eased to 1.8% YoY, but was lower 3.3% QoQ. On a brighter note, Niaga posted healthy growth in the key areas namely MSME (0.9% YoY), commercial (4.9% YoY) and corporate (7.3% YoY). In contrast, consumer banking segment (-6% YoY) remains a drag to Niaga’s overall loan growth which was derailed by auto (-39.6% YoY) and personal (-7.8% YoY) sub-segments. Management highlighted that loan growth will come in stronger in 2H18, chiefly from corporate as a result of participation in the infrastructure-related loans.

Deposits. Total deposits accelerated by 8.8% YoY, driven by a 7.4% growth in CASA. Niaga’s CASA ratio was 55.0% vs 52.5% end-2017.

NIM. As expected (and guided by management previously), NIM declined to 5.1% in 1Q18 (from 5.2% in 4Q17). This was due mainly to (i) intense competition for deposits; and (ii) surplus liquidity. We believe the pressure in the NIM was partly due to lagged effect from BI rate cut (in Sept 17).

Asset quality. Efforts in trimming gross impaired loan have started paying off, evidenced by a lower gross impaired loan of 3.51% (vs. 3.75% in in 4Q17) and credit cost of 1.79% (vs. 2.02 in 4Q17). During the quarter, corporate, MSME and consumer segments posted better GIL, but partly offset by weaker GIL at the commercial segment (which GIL increased to 8.8% from 8.2% in 4Q17). Loan loss coverage, on the other hand, declined marginally to 105.5% (from 107% 4Q17).

Higher cost to income ratio, but still under controlled. Operating cost inched up by 4.4% YoY to Rp1,009bn, driving cost to income higher to 48.58% vs 47.51% in 4Q17. We believe it is justified as management ramps up expenses in the digital banking.

Forecast. Despite stellar results by Niaga. we make no change to our forecast as this has already imputed in our forecast.

Maintain BUY, TP: RM7.90. We foresee receding issue on asset quality in Niaga and credit cost to improve further to below 150bps. Niaga is expected to post another set of earnings recovery in FY18 that will improve CIMB ex-Malaysia contribution that was beleaguered by higher provision issue previously. We maintain our BUY rating with unchanged TP of RM7.90 based on (i) COE of 10% and (ii) WACC of 8.7%.

Source: Hong Leong Investment Bank Research - 26 Apr 2018