No surprises, CIMB’s 4Q18 core earnings fell 5% QoQ given negative Jaws from weak NOII and higher opex. Positive reads were better asset quality and spurt in loans growth. However, NIM contraction was an uninspiring trend. Overall, our forecasts are unchanged. We believe CIMB’s risk-reward profile is still balanced despite its inexpensive valuations given there is downside risk to street’s 2019- 20 earnings projection (we are conservative vs them). Retain HOLD with a GGM TP of RM6.00, based on 1.03x 2019 P/B.

In line. CIMB registered 4Q18 core net profit of RM1.1b (-5% QoQ, +5% YoY), lifting 2018 core earnings to RM4.7b (+4% YoY). This was in line with estimates, forming 98% of our and consensus full-year forecast.

Dividend. Proposed a 2nd interim DPS of 12sen (flat YoY), which brought full-year DPS to 25sen (flat YoY).

QoQ. Core earnings fell 5% due to weak non-interest income (NOII, -9%) and higher opex (5%). Also, net interest margin (NIM) continued to slide down to 2.45% (-4bp). The decline in NOII came on the back of poor investment income (-65%) while the rise in opex was owing to marketing cost which doubled.

YoY. The fall in NOII (-28%) was again the culprit, which capped core profit from growing faster (+5%). This was no thanks to: (i) lethargic fee and commission income (-23%) along with (ii) narrower forex gains (-73%). However, the lower allowance for bad loans (-50%) was a positive read.

YTD. Lower impaired loans allowances (-36%) and lower effective tax rate (-3ppt to 21%) helped core net profit to climb 4%. Essentially, these two mitigated the negative Jaws created by weak NOII (-19%) given lower forex gains (-95%) along with income decreases at both its asset management (-51%) and brokerage businesses (-69%).

Other key trends. Loans growth picked up pace (+6.8% YoY) and it was tracked closely by the increase in deposits (+6.4% YoY). However, loan-to-deposit ratio (LDR) remained high at 93% (-2ppt sequentially). That said, asset quality saw continuous improvement with gross impaired loans (GIL) ratio down 16bp QoQ to 2.91%.

Outlook. We continue to see NIM slippage in 2019-20 given inelasticity to optimize LDR. However, we expect only a slight dip of 2bp (unlike -13bp in 2018) due to the upward revision of its base rate and base lending rate by 10bp back in December 2018. As for loans, we expect growth to taper to 4-5% in 2019-20 given the challenging economic climate. That said, asset quality is not anticipated to wither but we assumed a more normalised higher 2019-20 net credit charge of 51-52bp (2018: 41bp).

Forecast. Unchanged as 4Q18 results were within estimates.

Retain HOLD and GGM-TP of RM6.00, based on 1.03x 2019 P/B with assumptions of 9.1% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year mean of 1.09x and the sector’s 1.18x. The discounts are fair due to its lower ROE, which is 1ppt beneath both its 5-year and industry averages. For now, the stock’s risk-reward profile seems balanced. Although CIMB is trading close to -1SD to its 5-year mean P/B and P/E, we think there is still scope for 2019-20 earnings downgrade by the street (too bullish with their projections but we are already 3-7% more conservative vs them).

Source: Hong Leong Investment Bank Research - 1 Mar 2019