Niaga’s results were in line with street expectations. 3Q18 net profit rose marginally by 0.9% YoY to Rp824bn, lifting 9M18 net profit to RP2.59tn (+18% YoY). Loan growth eased to 2.2% YoY (3% YoY in 6M18) weighed by consumer banking while total deposits moderated to 3.8% YoY (9.1% YoY in 6M18). Despite weak NII and slower CASA QoQ, Niaga’s NIM was higher by 14bps QoQ to 5.17%. GIL eased marginally to 3.41% (3.39% in 6M18) attributed to improvement in commercial and SME segment. No change to our earnings forecasts, TP of RM5.80 (COE: 13.5%, WACC: 10.1%) and HOLD rating.

Better performance. Niaga posted sequentially higher net profit in 3Q18 which came in within street expectations. 3Q18 net profit rose marginally by 0.9% YoY to Rp824bn, lifting 9M18 net profit to Rp2.59tn (+18% YoY) aided by (i) 23.6% YoY growth in NOII and (ii) -26.8% YoY easing in provision, but partly offset by lower net interest income arising net interest margin erosion following the recent rate hike in Indonesia.

Loan growth eased. Loan growth eased to 2.2% YoY (3% YoY in 6M18) weighed by consumer banking segment, which declined by-2.2% YoY (-5% YoY in 6M18) and corporate banking banking segment, which growth eased to 3.6% (8.8% YoY in 6M18). Consumer banking segment was impacted by cautious lending to hire purchase segment while corporate banking was weighed by repayment activity as Niaga repriced their loan yield higher and hence, firm decided to repay their loan faster than expected to avoid the higher interest incur. Despite the tepid loan growth in 9M18, management reiterated that it is on track to achieve its mid-single digit loan growth target.

Deposits softened. Total deposits growth moderated to 3.8% YoY (9.1% YoY in 6M18), weighed by the deceleration in CASA growth to 3.7% YoY (12.8% YoY in 6M18) and time deposits growth to 3.9% YoY (4.8% YoY in 6M18).

NIM recovered. Despite weak NII and slower CASA QoQ, Niaga’s NIM was higher by 14bps QoQ to 5.17% given the effect of loan repricing at a faster pace. On 9M18, NIM was higher by 3bps to 5.12% attributed to the steady CASA growth of 3.7% YoY while time deposits growth moderated to 4.8% YoY. Management reiterated 5% NIM target as the impact of recent rate hike by another 25bps to 5.75% in September will hit the funding cost again. Rate hikes in Indonesia normally lead to short-term NIM squeeze because loan rates are not adjusted upwards until 2 to 3 months later on average, while deposit costs are repriced upwards immediately.

Asset quality a wild card. Despite GIL improvement in commercial and SME segment, GIL eased marginally to 3.41% (3.39% in 6M18) as it was offset by higher GIL in corporate and consumer segment. Special mention loan reduced to 6.01% (6.14% in 6M18) as the repayment post festive season improved. Similarly, credit cost improved further by 67bps to 1.67% and is expected to further recover in 4Q18 to hit 150bps credit cost guidance.

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

Maintain HOLD, TP: RM5.80. We believe the transformation works are done in Niaga and the main focus is to grow its business. While Niaga’s earnings are on track according to management guidance, the impact of further rate hike may deter its NIM, however further recoveries will offset the overall NII weakness. 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 - 1 Nov 2018