CIMB Niaga’s 1H18 net profit of Rp1.76tn (+28% YoY) was attributed to higher non-interest income (42.5% YoY) and lower provisions (-22.8% YoY). Loan growth advanced by 3% YoY despite dragging by consumer banking segment while deposit continued to outpace loan growth, rising by +9.1% YoY. NIM stabilised at 5.09% in 1H18 (-1bps YoY) and credit cost improved to 165bps vs 235bps in 1H17. Asset quality, on the other hand, continues to improve with GIL ratio declining to 4.36% (vs. 4.61% in 1Q18). No change to our earnings forecasts, TP of RM5.80 (COE: 13.5%, WACC: 10.1%) and HOLD rating.

Better performance. Niaga posted further earnings recovery with 2Q18 net profit growing further to Rp891bn (+20.4% YoY, +1.7% QoQ), lifting 1H18 net profit to Rp1.76tn (+28% YoY). The strong earnings recovery recorded in 1H18 was driven by (i) improved NOII (+42.5% YoY) (ii) easing provision (-22.8% YoY). Better NOII performance was boosted by arranger and syndication fees (+193% YoY) and forex and derivatives income (+58% YoY).

Loan growth. Niaga’s loan improved further by 3% YoY despite being dragged by the consumer banking segment. Consumer banking was impacted by auto loan (-37.3% YoY) which led to loans at the consumer banking segment declining by 5% YoY. The slack was mitigated by higher loan growth in 3 areas, namely (i) corporate banking (+8.8% YoY) (ii) commercial banking (+5.7% YoY) and (iii) MSME banking (+1.7% YoY). While management reiterated its optimism on stronger loan growth in 2H18 from corporate banking, we believe consumer banking segment may threat the overall loan growth. Management continues to target single-digit loan growth for FY18.

Deposits. Total deposits continued to outpace loan growth, rising by +9.1% YoY, assisted by the recovery of time deposits by +9.1% YoY. Likewise, CASA accelerated faster by +12.8% YoY and the ratio improved to 56.1% vs. 54.3% in 1H17.

NIM. NIM downtrend has started tapering off at 5.09% in 1H18 (-1bps YoY). Despite expecting more rate cuts in 2H18, management is maintaining its NIM guidance at around 5% as lending yield repricing effect starts to kick in to offset the pressure from funding side.

Asset quality. Gross impaired loan ratio improved to 4.36% vs. 4.61% in 1Q18, contributed by improvement at the corporate segment (1.1% vs. 1.9% in 1Q18), which was partially offset the weakness in other segments, namely commercial (9.3% vs. 8.8% in 1Q18), MSME (3.2% vs. 3.0% in 1Q18) and consumer (2.6% vs. 2.5% in1Q18). The better asset quality pushed down Niaga’s credit cost to 167bps (vs. 235bps recorded in 1H17).

Forecast. No change to our forecast, pending release of CIMB Group results scheduled on 29 August.

Maintain HOLD, TP: RM5.80. Niaga is poised to record earnings recovery on the back of receding provision and improving NOII prospect. However, the risks of downwards NIM movement (due to rate hike) and pick up in general admin and promotion expenses will limit the bigger earnings recovery and hence, limit its upside potential. We maintain our HOLD rating on CIMB Group with unchanged TP of RM5.80 based on (i) COE of 13.5% and (ii) WACC of 10.1%.

Source: Hong Leong Investment Bank Research - 15 Aug 2018