CIMB’s 2Q19 core net profit rose 8% QoQ due to positive Jaws and credit loss writebacks; this was within expectations. Also, we observed CIMB sustained its robust loans growth. However, NIM contracted sequentially and asset quality weakened. All in, our forecasts are unchanged. Although we think there is opportunity to trade the stock at this price level, we are not inclined to upgrade CIMB as there are better banking picks within the sector. Also, it has a relatively high foreign shareholding (>25%), making it more susceptible to sell-off and its dividend reinvestment scheme is EPS dilutive in nature. Retain HOLD and GGM TP of RM5.45, based on 0.91x 2020 P/B.

In line. Stripping away one-off disposal gains, CIMB chalked in 2Q19 core net profit of RM1.3b, (+8% QoQ, +22% YoY), bringing 1H19 bottom-line to RM2.5b (+12% YoY). This met estimates, accounting for 50-51% of our and consensus full-year forecasts.

Dividend. A 1st interim DPS of 14sen (+8% YoY) was proposed. Ex-date TBD later.

QoQ. Core earnings rose 8% given (i) positive Jaws as total income accelerated 2ppt quicker vs opex, while (ii) the credit loss writebacks on financial assets, commitments and contingencies, tripled during the quarter. That said, these were mitigated by the net interest margin (NIM) slippage of 11bp to 2.37% due to the OPR cut in May-19.

YoY. Better total revenue growth (+8%), lower allowance for bad loans (-5%), coupled with higher writebacks on financial assets, commitments and contingencies (+5-fold), helped CIMB to register core net profit expansion of 22%.

YTD. Despite posting negative Jaws (which led to pre-provision profit down 2%), core bottom-line increased 12% on the back of lower impaired loan allowances (-16%) and it booked in RM131m writebacks on financial assets, commitments and contingencies vs an impairment charge of RM4m in 1H18.

Other key trends. Loans growth was sustained at 6.9% YoY (1Q19: +7.6%) and was buoyed by the 10.0% YoY rise in deposits (low base; 1Q19: +5.7%). However, loan to-deposit ratio (LDR) was still at an elevated level of 93% (flat QoQ). That said, asset quality weakened, seeing gross impaired loans (GIL) ratio spiked up 13bp to 3.12%, no thanks mainly to a single bad loan relating to Malaysian manufacturing company.

Outlook. We still see NIM being challenged by its loan portfolio de-risking strategy at Indonesia and Thailand (switch to lower-yielding but safer assets). However, loans growth momentum is expected to remain robust (at 4-5%), led by Malaysia (grabbing market share from competitors) and Indonesia (more infra-related drawdowns and the contraction in auto loans has halted). As for asset quality, it should remain stable from here on since it has been steering its lending mix to sounder and less risky categories.

Forecast. Unchanged as 2Q19 results were within estimates. Also, management kept its overall 2019 guidance.

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 1.00x. The discounts are fair due to its lower ROE, which is 1ppt beneath its 5-year and industry average. Although we think there is opportunity to trade the stock at this price level, we are not inclined to upgrade CIMB as there are better banking picks in the sector. Also, it has a relatively high foreign shareholding (>25%), making it more susceptible to sell-off and its dividend reinvestment scheme is EPS dilutive in nature.

Source: Hong Leong Investment Bank Research - 30 Aug 2019