The 8% YoY rise in 4Q19 core earnings was within expectations; this was due to positive Jaws, arising from widening NIM and better recoveries. However, loans growth momentum slowed and GIL ratio ticked up during the quarter. Forecasts were unchanged. Overall, we are positive on CIMB, expecting an introduction of a cash portion to its dividend payout (which 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 0.93x FY21 P/B.

Within expectation. Excluding the one-off MSS expense in 3Q19, CIMB Niaga (93%- owned) posted 4Q19 core profit of IDR966b (-1% QoQ, +8% YoY). This brought FY19 adjusted earnings to IDR3,913b (+12% YoY), which was within our estimates, making up 100% of our full-year forecasts but came in above consensus (110%).

QoQ. The 1% core bottom decline was no thanks to negative Jaws as total income fell 6%: (i) net interest margin (NIM) slipped 15bp due to downward loan repricing and (ii) non-interest income (NOII) decreased 15% given lesser recoveries (-35%) and fees (- 16%). However, the lower loan loss allowances (-16%) was an offsetting factor.

YoY. Core net profit rose 8% on the back of stronger total income performance (+5%) as NIM widened (+3bp) and NOII spiked 10%, fuelled by recoveries (+2.5-fold). This coupled with a slower 2% rise in opex, mitigated the 10% rise in bad loan provision.

YTD. Positive Jaws from quicker total income growth vs slower opex expansion (+6% vs +4%) led core earnings to climb 12%. This came on the back of NIM broadening by 19bp, higher recoveries of 75%, and syndication fees improving by 50%.

Other key trends. Loans growth momentum slowed to +3.1% YoY (3Q19: +4.9%) but deposits picked up pace to +2.5% YoY (3Q19: -2.1%). In turn, loan-to-deposit ratio fell 1ppt to 99%. As for asset quality, gross impaired loans (GIL) ratio saw a deterioration of 72bp QoQ to 3.81% (mainly due to chunky corporate NPLs).

Outlook. Despite the possibility of 1 rate reduction in FY20, NIM is seen to be resilient as most of Niaga’s deposits have not repriced downwards to the 4 rate cuts in 2H19. Separately, loans growth should pick up pace over the next one year, as businesses are now expected to be more willing to invest, since President Jokowi stays in power for a second term (better economic clarity and political decisions); we see this coming primarily from state-owned and infrastructure-related corporate loans. Besides, Niaga will remain focus on growing its consumer and SME lending portfolio.

Forecast. Unchanged as Niaga’s 4Q19 results were in line; it contributes c.20-25% to group’s PBT. We note CIMB Group is poised to release its 4Q19 financials on 28 Feb.

Retain BUY and GGM-TP of RM5.70, based on 0.93x FY21 P/B with assumptions of 8.6% ROE, 9.0% COE, and 3.0% LTG. This is still below its 5-year mean of 0.98x and sector’s 0.95x. The discounts are fair given its lower ROE, which is 1ppt beneath its 5- year and industry average. We are 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 - 20 Feb 2020