Unsurprisingly, CIMB Thai’s 2Q19 core earnings dropped 47% YoY. The weak results were owing to MTM losses, NIM slippage, higher opex and taxes. Also, asset quality sapped a little as gross NPL ratio inched up 20bp QoQ. That said, loans growth picked up pace. Overall, impact to group’s numbers is minimal since earnings contribution is <10%. 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 mean 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 RM5.45, based on 0.91x FY20 P/B.

Within expectations. CIMB Thai (95%-owned) registered 2Q19 core earnings of THB102m (-34% QoQ, -47% YoY). This came in within our and consensus estimates, making up 53% and 50% of respective full-year forecasts; contribution to overall group’s showing is immaterial as Thai’s profit contribution is <10%.

QoQ. Core earnings declined 34%, no thanks to higher opex (+17%) and tax charges (+39%). Also, total revenue growth was lethargic (+2%) as net interest margin (NIM) contracted 2bp due to escalating cost of funds. However, the negatives were softened by the 29% fall in loan loss provision.

YoY. Negative Jaws and higher taxes (jumped 3x) drove down core profit by 47%; non-interest income (NOII) fell 18% given THB806m mark-to-market (MTM) losses (vs a gain of THB219m in 2Q18) while opex spiked up 26%. Again, bad loan allowances (-44%) cushioned the decline in bottom-line.

YTD. Similar to the above, core earnings (-29%) was dragged by weak total income (- 2%), higher opex (+17%) and taxes (+62%). Once more, these were mitigated by the lower provision for impaired loans (-31%).

Other key trends. Net loans growth gained traction (+11% YoY) but deposits tapered slightly (+7%). In turn, net loan-to-deposit ratio remained elevated at 120% (+3ppt sequentially). As for asset quality, gross non-performing loan ratio inched up 20bp QoQ to 4.5% due to slower repayment abilities of few corporate and retail accounts.

Outlook. NIM compression at CIMB Thai is expected to linger on the back of the strategy switch to lower-yielding but safer assets. However, this will be compensated by lower bad loan provision. Cost-wise, personnel expenses will continue to creep upwards owing to its Fast Forward expansion strategy. That said, we will get more updates from the pre-closed period meeting with management next week.

Forecast. Unchanged as CIMB Thai’s 2Q19 results were within expectations.

Retain HOLD and GGM-TP of RM5.45, based on 0.91x 2020 P/B with assumptions of 8.7% ROE, 9.3% COE, and 3.0% LTG. This is below its 5-year mean of 1.03x and the sector’s 1.12x. 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 2-7% lower)

Source: Hong Leong Investment Bank Research - 18 Jul 2019