Largely in line. CIMB Thai (95%-owned) registered 3Q19 core profit of THB298m (tripled QoQ, +68% YoY), bringing 9M19 sum to THB555m (+3% YoY). This is largely in line with our and consensus expectations, making up 78% and 73% of respective full-year forecasts; its contribution to overall group’s PBT is minimal (<10%).

QoQ. Core earnings tripled, thanks to lower allowance for bad loans (-15%) and tax charges (-93%). Otherwise, pre-provision profit was down 8% on the back of soft top line growth (+2%) vs a quicker rise in opex (+5%); net interest margin (NIM) continued to decline during the quarter (-7bp).

YoY. The fall in impaired loan provision (-37%) and taxes (-69%) helped to lift up core profit by 68%. Without these, pre-allowance earnings would have contracted by 26% due to negative Jaws; although fees and investment income rose 31% and jumped 80x respectively, these were insufficient to mask the adverse effect of NIM slippage (- 41bp) and opex accelerating by 19%.

YTD. Similar to above, core bottom-line showed a 3% improvement, owing largely to smaller bad loan allowances (-33%). Again, the presence of negative Jaws from weak revenue (+1%) and higher opex (+18%), dragged pre-provision profit down by 27%.

Other key trends. Net loans and deposits maintained their growth momentum at 10% and 6% YoY respectively. With these, sequential net loan-to-deposit ratio was still at an elevated level of 117% (-3ppt QoQ). As for asset quality, gross non-performing loan ratio ticked up 10bp QoQ to 4.6%, arising from slower repayment abilities of few corporate and retail accounts.

Outlook. NIM compression at CIMB Thai is seen to linger on the back of the plan to 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 later this week.

Forecast. Unchanged as CIMB Thai’s 3Q19 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 and sector’s 1.00x. The discounts are warranted 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 - 23 Oct 2019