CIMB Thai’s 4Q19 Core Profit Jumped 84% QoQ, Meeting Estimates. The Strong Results Were Owing to Lower Allowance for Bad Loans and Positive Jaws. Despite Loans Growth Tapering, It Was Still at a Robust Level of +6.4% YoY. Besides, Asset Quality Was Stable With Its NPL Ratio Staying Flat Sequentially at 4.6%. All in All, Our Forecasts Were Unchanged. We Have Turn Positive on CIMB With a View That Management Will Introduce a Cash Portion to Its Dividend Payout (should Help to Defend ROE Better) and It Provides One of the Best Values (pricing-wise) Among Larger Banks. Retain BUY and GGM-TP of RM5.70, Based on 0.92x 2021 P/B.

Within expectations. Excluding NPL sale gains, CIMB Thai (95%-owned) registered 4Q19 core earnings of THB548m (+84% QoQ, vs -THB757m in 4Q18). This brought FY19 sum to THB1,103m (vs -THB220m in FY18), which were largely within our and consensus estimates, making up 101-102% of full-year forecasts; its contribution to overall group’s PBT is minimal (<10%).

QoQ. Core profit jumped 84%, thanks mainly to lower allowance for bad loans (-52%). Otherwise, pre-provision profit was up only 7%; this came from decent top-line growth (+3%) vs a slower opex increase (+2%), leading to positive Jaws. However, we note net interest margin (NIM) contracted during the quarter (-8bp).

YoY. Again, the fall in impaired loan provision (-82%) helped to lift up core earnings to THB548m (vs -THB757m in 4Q18). Also, the robust top-line (+11%) contributed to the overall better performance, given higher fee income from insurance and debt capital markets (+70%); this helped to mask the adverse effect of NIM slippage (-25bp).

YTD. Similar to above, core bottom-line has improved to THB1,103m (vs -THB220m in FY18), owing largely to smaller bad loan allowances (-49%). However, we noticed that pre-provision profit was dragged down 21% due to the presence of negative Jaws from weak total income (+3%) and higher opex (+16%).

Other key trends. Net loans growth decelerated to 6.4% YoY (3Q19: +10%) but was buoyed by the 7.5% YoY rise in deposits (3Q19: +6.2%). With these, sequential net loan-to-deposit ratio fell 1ppt QoQ to 116%. As for asset quality, gross NPL ratio was flat sequentially at 4.6%.

Outlook. While deposit competition in Thailand is currently stable, CIMB Thai may still have to contend with NIM compression as funding is needed to ramp-up its business activities. That said, this will be compensated by lower bad loan provision, as a result of its remedial actions to improve assets quality. Cost-wise, personnel expenses will continue to stay at elevated levels, owing to its Fast Forward expansion strategy.

Forecast. Unchanged as CIMB Thai’s 4Q19 results were within expectations.

Retain BUY and GGM-TP of RM5.70, based on 0.92x 2021 P/B with assumptions of 8.5% ROE, 9.0% COE, and 3.0% LTG. This is still below its 5-year mean and sector’s 1.00x. The discounts are fair given its lower ROE, which is 1ppt beneath its 5-year and industry average. We have turn positive on CIMB with a view that management will introduce a cash portion to its dividend payout (should help to defend ROE better) and it provides one of the best values (pricing-wise) among larger banks.

Source: Hong Leong Investment Bank Research - 22 Jan 2020