CIMB Thai’s 1Q19 core net profit fell 8% YoY, missing estimates. Weak results were owing to MTM losses, escalating opex, and NIM compression. However, impact to group’s numbers is minimal as earnings contribution is only c.6%. That said, we cut our FY19-21 profit by 2-4% due to weak NOII outlook. Overall, CIMB’s risk-reward profile remains balanced despite its seemingly inexpensive valuations considering there is downside risk to consensus’ FY19-21 earnings projection (we are lower vs them). Maintain HOLD but with a lower GGM-TP of RM5.60 (from RM6.00), based on 0.98x FY19 P/B.

Missed expectations. CIMB Thai (95%-owned) posted core earnings of THB156m (vs 4Q18: -THB757m, -8% YoY). This came in below our and consensus estimates, accounting for 9-10% of respective full-year forecasts. Nevertheless, impact to overall group’s performance is immaterial as Thai’s profit contribution is only c.6%.

QoQ. Core earnings improved to THB156m from a loss of THB757m, mainly thanks to lower opex (-10%) and loan loss provision (-39%). Besides, we saw positive Jaws as total revenue improved 4%, on the back of higher fee income (+24%) and narrower mark-to-market losses (MTM, -16%). That said, results could have been better if not for the net interest margin (NIM) slippage of 22bp due to higher cost of funds.

YoY. The sharp 26% fall in non-interest income (NOII) that caused by the THB840m MTM losses (vs a gain of THB136m in 1Q18) coupled with the escalating opex (+8%), drove down core profit (-8%); the higher expenditure was in line with the CIMB Thai’s Fast Forward expansion strategy, whereby personnel and premise-related costs jumped up 12% and 16% respectively. The only bright spot came from declining bad loan allowances (-17%).

Other key trends. Net loans gained momentum (+10% YoY) and deposits followed suit (+7%). In turn, net loan-to-deposit ratio remained high at 117% (flat sequentially). As for asset quality, gross non-performing loan ratio was unchanged QoQ at 4.3%.

Forecast. Although CIMB Thai’s earnings contribution to Group is not substantial, we took a closer look at our NOII assumption and opted to tone it down by 2-6% on the back of muted capital market activities and slower business climate. Similarly, the Securities Commission Malaysia has also shared that it expects fund raising from IPO and debt issuance to be at c.RM110-120b in 2019, as compared to RM115b in 2018, which we note was a subdued year. Overall, we cut our FY19-21 profit by 2-4%.

Maintain HOLD but with a lower GGM-TP of RM5.60 (from RM6.00), following our earnings cut and based on 0.98x 2019 P/B (from 1.04x) with assumptions of 8.9% ROE (from 9.3%), 9.0% COE, and 3.0% LTG. This is below its 5-year mean of 1.07x and the sector’s 1.15x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath both its 5-year and industry average. Also, this helps to explain the reason for trading near to -1SD to its 5-year mean P/B and P/E. Besides, we think there is still scope for FY19-21 earnings downgrade by consensus (too bullish with their projections but we are already 3-9% lower vs them). Hence, despite its seemingly attractive valuations, the stock’s risk-reward profile remains balanced.

Source: Hong Leong Investment Bank Research - 19 Apr 2019