CIMB chalked in a decent quarter with 1Q19 core net profit increasing 5% QoQ, meeting expectations. This was thanks to positive Jaws as total income growth was faster than opex, credit loss writebacks, and lower effective tax rate. Also, NIM expanded and was ushered by steady loans growth. Besides, asset quality was stable. Overall, our forecasts are unchanged. For now, the stock’s risk reward profile remains balanced despite its seemingly inexpensive valuations (trading at -1SD to its 5-year average P/B and P/E) given the downside risk to consensus FY19-21 earnings projection (ours are more conservative). Maintain HOLD and GGM-TP of RM5.60, based on 0.98x FY19 P/B.

In line. Stripping away one-off disposal gains, CIMB chalked in 1Q19 core net profit of RM1,176m, (+5% QoQ, +2% YoY). This met estimates, constituting 24% of both our and consensus full-year forecasts. Recall, 1Q18 formed 25% of FY18’s net profit.

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core earnings rose 5% given: (i) positive Jaws as total income climbed 40bp quicker vs opex, (ii) RM34m credit loss writebacks on financial assets, commitments and contingencies, coupled with (iii) lower effective tax rate of 1ppt. Also, net interest margin (NIM) widened 3bp to 2.48%, thanks mainly to its upward revision in domestic lending rate back in Dec-18.

YoY. The lower allowance for bad loans (-25%), credit loss writebacks, and a decline in tax charges (-2%), helped CIMB to demonstrate a profit expansion (+2%). Without these, pre-provision profit would have decreased 8% on the back of negative Jaws due to higher opex (+8%) while total revenue growth was flat.

Other key trends. Loans growth was sustained at 7.6% YoY (4Q18: +6.8%) and was buoyed by the 5.7% YoY rise in deposits (4Q18: +6.4%). With the latter not picking up at a faster pace, loan-to-deposit ratio (LDR) was still at an elevated level of 93% (flat QoQ). However, asset quality was stable despite the mild 8bp uptick in gross impaired loans (GIL) ratio to 2.99%.

Outlook. We see the return of NIM compression (2019: -3bp) as a result of the recent domestic OPR cut coupled with the loan portfolio de-risking strategy at Indonesia and Thailand (switch to lower-yielding but safer assets). While for loans growth, we expect the momentum to remain robust (at 4-5%), led by Malaysia (grabbing market share from rivals) and Indonesia (more infra-related drawdowns and a reprieve from the dwindling auto and personal financing segments). Besides, the recovery at its treasury business (thanks to falling MGS yields) is likely to aid an improvement in NOII (2019: +4%). Overall, 2019 total revenue is seen to grow by a decent 4%, helping to prevent a negative Jaws ratio. Also, asset quality is not anticipated to wither.

Forecast. Unchanged as 1Q19 results were within estimates. Also, management kept its overall 2019 guidance.

Retain HOLD and GGM-TP of RM5.60, based on 0.98x 2019 P/B with assumptions of 8.9% ROE, 9.0% COE, and 3.0% LTG. This is below its 5-year mean of 1.06x and the sector’s 1.14x. The discounts are warranted due to its lower ROE generation, which is 1ppt beneath its 5-year and industry average. Also, this helps to explain the reason for trading at -1SD to its 5-year mean P/B and P/E. Hence, despite its seemingly attractive valuations, the stock’s risk-reward profile remains balanced. Moreover, we think there is still scope for FY19-21 earnings downgrade by consensus (ours are 3-10% lower).

Source: Hong Leong Investment Bank Research - 30 May 2019