The 9% QoQ net profit rise in 2Q19 were largely within expectations; this was due to NIM expansion and drop in personnel cost. However, loans growth lost momentum. On a brighter note, asset quality improved. Overall, our forecasts are unchanged. For now, the stock’s risk-reward profile is still balanced despite its seemingly inexpensive valuations (trading at -1SD to its 5-year mean P/B) given downside risk to consensus FY19-21 earnings projection (ours are more conservative). Retain HOLD and GGM-TP of RM5.45, based on 0.91x FY20 P/B.

Largely in line. CIMB Niaga (93%-owned) posted 2Q19 earnings of IDR1,032b (+9% QoQ, +16% YoY), bringing 1H19 net profit to IDR1,976b (+12% YoY). This was in line with expectations, making up 51% of our full-year forecasts but came in 55%, slightly at the upper end of consensus’ estimates.

QoQ. The 9% bottom-line increase was thanks to positive Jaws as pre-provision profit was up 10%; total revenue grew 4% on a 25bp net interest margin (NIM) expansion while opex fell 2% on the back of a 4% drop in personnel costs. However, these were capped slightly by higher loan loss allowances (+14%).

YoY. Again, net profit growth of 16% was trickled down from the stronger total income performance (+11%) as NIM widened (+50bp) and non-interest income (NOII) jumped 9%, fuelled by higher forex gains (+73%). This coupled with a slower 5% rise in opex (personnel cost rose 10%), mitigated the 15% spiked in impaired loan provision.

YTD. CIMB Niaga’s earnings climbed 12% given lower provision for bad loans (-2%), booked mainly in 1Q19, along with a robust 6% top-line growth (NIM expanded 32bp, stronger forex gains of 35% and syndication fees doubled).

Other key trends. Loans growth lost pace to 2.6% YoY (1Q19: +5.0%) but deposits returned to growth at 4.0% YoY (1Q19: -0.5%). Although this led loan-to-deposit ratio (LDR) to fall 2ppt to 96%, it was still at a high level. However, we saw an improvement in asset quality where gross impaired loans (GIL) ratio declined 75bp QoQ to 3.17%.

Outlook. With Bank Indonesia now in the mood to cut rates, we believe positive loan repricing in relation to last year’s six interest hike would be more modest. In turn, NIM improvement is seen to be limited as management also looks to further de-risk its lending portfolio. Besides, we gathered that there is still lack of liquidity in the system, making cost of funds expensive. As for loans growth, with President Jokowi remaining in power for a second term (more clarity in economic and political decisions), we see it picking up momentum in 2H19. Furthermore, the contraction in auto loans has halted while infra-related drawdown is seen to gain traction in upcoming quarters.

Forecast. Unchanged as CIMB Niaga’s 2Q19 results were in line; it contributes c.24% to group’s PBT.

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 1.02x and the sector’s 1.05x. The discounts are fair 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. 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 1-7% lower).

Source: Hong Leong Investment Bank Research - 16 Aug 2019