Results in-line; CIMB’s 3Q19 core net profit was flat QoQ as total income growth got erased by higher bad loans provision and expected credit losses. Positively, NIM recovered but loans growth tapered and asset quality weakened slightly. Forecasts were left unchanged. Overall, 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. Maintain HOLD and GGM-TP of RM5.45, based on 0.91x FY20 P/B.

Within expectations. Excluding one-off transformational cost (in 3Q19) and disposal gains (in 2Q19), CIMB posted 3Q19 core earnings of RM1.3bn (flat QoQ, +8% YoY). This brought 9M19 adjusted net profit to RM3.7bn (+10% YoY), which came in within estimates, making up 77% of both our and consensus full-year forecasts respectively.

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core bottom-line was flat despite a robust total income showing (+10%) due to higher provision for bad loans (+23%) and RM123m expected credit losses booked on other financial assets and commitments vs RM97m writebacks in 2Q19. Net interest margin (NIM) widened 16bp to 2.53% given downward deposit repricing in Malaysia.

YoY. Good top-line growth of 12% trickled down and led to core net profit expansion of 8%; this was thanks to improved NIM (+4bp) and better investment income (+46%).

YTD. Core earnings rose 10% on the back of lower impaired loan allowances (-10%) and booked RM8m writebacks on financial assets and commitments vs an expected credit loss charge of RM114m in 9M18.

Other key trends. Loans growth tapered to 5.6% YoY (2Q19: 6.9%) but was buoyed by the 7.7% YoY rise in deposits (high base; 2Q19: 10.0%). However, loan-to-deposit ratio (LDR) was still at an elevated level of 93% (flat QoQ). As for asset quality, it weakened slightly, seeing gross impaired loans (GIL) ratio inched up 3bp QoQ to 3.15%; this was owing to its residential and commercial property mortgage segments.

Outlook. Although NIM staged a recovery this quarter, it will be challenged in 4Q19 by a seasonally high deposit competition period in Malaysia, accompanied by a similar intense rivalry landscape in Indonesia (due to tight liquidity). However, loans growth momentum is seen to pick up strength, led by the two same countries (grab market share from rivals in Malaysia while in Indonesia, businesses should now be more willing to invest, considering President Jokowi stays in power for a second term). As for asset quality, it should stabilize and improve since it has been steering its loan mix to sounder and less risky categories.

Forecast. Unchanged as 3Q19 results were within estimates.

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 1-5% lower) and its high foreign shareholding (>25%), leaves it more susceptible to sell-offs.

Source: Hong Leong Investment Bank Research - 25 Nov 2019