Post management meeting, we believe Malaysia and Thailand units will cushion the weaker Niaga results. Niaga is impacted by on-going NIM compression (from 5th rate hike by Bank Indonesia). Malaysia’s loan is improving contributed by both HH and business whilst in Thailand, CIMB sees further slowdown in provision. All in, we believe CIMB will deliver better results in 2H18. Maintain our earnings forecasts, TP of RM5.80 and HOLD recommendation.

Following our meeting with management yesterday, we believe that a challenging environment in Indonesia will be cushioned by improving outlook in Malaysia, whilst Thailand will continue to reap benefits from recalibration of the loan book and improving GIL issue.

Challenging in Indonesia. Management guided that NII remains weak, on the back of (i) Bank Indonesia’s move to raise interest rate (by another 25bps to 5.75%) in Sept-18 (which has resulted in an immediate negative impact on Niaga’s NIM), and (ii) unexciting loan growth traction (as it does not participate in the infrastructure related loans). On a more positive note, management guided that the shortfall in the NII will be mitigated by better NOII and better provision, which management targets to achieve at the lower end of the 150bps-200bps (vs. 220 bps in FY17 and 170 bps in 1H18).

IDR weakness. The weakness in IDR has resulted in circa RM200m impact on CIMB’s top line (on group level). Management explained further that every 10% depreciation in IDR will depress CIMB’s CET1 by 10bps.

Better in Thailand. The situation in Thailand has improved, as asset quality has improved amidst stable loan growth outlook. Nonetheless, we are anticipating opex to inch higher attributed to the beefing up of sales team. Management guided credit cost of 100-150bps for FY18 (vs. 220 bps in FY17 and 170 bps in 1H18) as the loan book for SME segment has shrunk.

Pick up in Malaysia. After a quiet period for NOII in 1H18, CIMB sees a pickup in capital market activities (in particularly, within the fixed income space), and this will result in better NOII in 2H18. Management retained 8% loan growth for Malaysia where it sees momentum building up for both HH and business segments, leveraging on the tax holiday period and strong execution from the healthy pipeline. Management has been aggressive in the HH segment from July-September where it held various promotions to gain market share.

All in… we believe CIMB will deliver better results in 2H18. Improving situations in Malaysia and Thailand (better NII, NOII and credit cost) will be partly negated by Niaga.

Forecast. No Change to Our Forecast.

Maintain HOLD, TP: RM5.80. Maintain HOLD recommendation with unchanged TP of RM5.80 based on GGM valuations of (i) COE of 13.5% (ii) WACC of 10.1%. Niaga is still a dampener for CIMB as further weakness in Rupiah will trigger Bank Indonesia to make adjustment to interest rate and this ultimately impacts CIMB’s NIM on the group level.

Source: Hong Leong Investment Bank Research - 23 Oct 2018