The 18% YoY rise in 3Q19 core net profit was largely within estimates; this was due to positive Jaws, arising from NIM expansion and better recoveries. Also, loans growth gained momentum and GIL ratio fell during the quarter. Forecasts were left 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) and its high foreign shareholding level, leaves it more prone to sell-offs. Retain HOLD and GGM-TP of RM5.45, based on 0.91x FY20 P/B.

Largely in line. CIMB Niaga (93%-owned) posted 3Q19 core earnings of IDR971b (after stripping one-off MSS expense; -6% QoQ, +18% YoY), bringing 9M19 sum to IDR2,947b (+14% YoY). This was within expectations, making up 76-79% of our and consensus full-year forecasts, respectively.

QoQ. The 6% core bottom-line decline was no thanks to higher loan loss allowances (+17%). Otherwise, pre-provision profit was up 4% given better non-interest income (NOII; +30%); this came from higher recoveries (+5-fold). That said, the contraction in net interest margin (NIM; -24bp) was an offsetting factor.

YoY. Core net profit jumped 18%, trickling from stronger total income performance (+9%) as NIM widened (+12bp) and NOII spiked 23%, fuelled by recoveries (+3-fold). This coupled with a slower 2% rise in opex, mitigated the 25% spiked in impaired loan provision.

YTD. Positive Jaws from quicker total income growth vs slower opex expansion (+7% vs +4%) led core earnings to climb 14%. This came on the back of NIM broadening by 25bp, higher recoveries of 54%, and syndication fees improving by 57%.

Other key trends. Loans growth gained momentum to 4.9% YoY (2Q19: +2.6%) but deposits shrank 2.1% YoY (2Q19: +4.0%). In turn, loan-to-deposit ratio (LDR) rose 4ppt to 101%. As for asset quality, gross impaired loans (GIL) ratio declined 8bp QoQ to 3.09% (NPL sales at its commercial and SME segments).

Outlook. Seeing that Bank Indonesia cut its key interest rate for 4 successive months, we believe the positive loan repricing (in relation to 2018’s 6 interest rate hikes) would be more modest. Hence, NIM is expected to be pressured, as management also looks to further de-risk its lending portfolio and deposit rivalry in Indonesia remains intense. However, we see loans growth continuing to pick up pace over the next one year, as businesses should now be more willing to invest, considering President Jokowi stays in power for a second term (better clarity in economic and political decisions).

Forecast. Unchanged as Niaga’s 3Q19 results were in line; it contributes c.20-25% to group’s PBT. We note CIMB Group is poised to release its 3Q19 financials on 27 Nov.

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. Also, this helps to explain the reason for trading at -1SD to its 5-year mean P/B. Despite its seemingly attractive valuations, CIMB’s risk-reward profile remains balanced. We think there is scope for FY19-21 earnings downgrade by consensus (ours are 1-6% lower) and its high foreign shareholding (>25%), leaves it more susceptible to sell-offs.

Source: Hong Leong Investment Bank Research - 1 Nov 2019