Results in-line; CIMB’s 4Q19 core net profit fell 6% YoY as total income growth got erased by higher impaired loan provision. Positively, NIM held steady, loans growth gained traction, GIL ratio declined, and CIMB introduced a cash portion to its dividend payout (which should help to defend ROE better). Regardless, we cut FY20-21 profit by 3% to factor in higher NIM contraction. Overall, we still like CIMB for generating above average growth and also, it provides one of the best values (pricing-wise) among larger banks. Keep BUY but with a lower GGM-TP of RM5.50 (from RM5.70), based on 0.90x FY21 P/B.

In line. Excluding one-time intangible asset write-off (4Q19) and transformational cost (in 3Q19), CIMB recorded 4Q19 core earnings of RM1.0b (-18% QoQ, -6% YoY) which brought FY19 adjusted net profit to RM4.8b (+6% YoY). This was within estimates, making up 98-99% of both our and consensus full-year forecasts respectively.

Dividend. A final cash DPS of 12sen (flat YoY) was proposed. Ex-date TBD later. As such, CIMB has fixed a 50% cash and 50% electable portion to its dividend payout.

QoQ. Core earnings declined 18%, no thanks to weak total income (-3%) and higher bad loan allowances (+50%). At the top, non-interest income (NOII) fell 13% due to trading losses and this overshadowed net interest margin (NIM), which held steady.

YoY. The 8bp NIM improvement and 13% NOII rise (forex gain quintupled), led to top line growing 11%. These created positive Jaws but did not trickled down to core profit (-6%) as loan loss provision doubled.

YTD. Core bottom-line increased 6% given robust total income growth (+8%) as NOII rose 9%; this came from better trading income (+8%) and forex gain jumped 5-fold. However, this was capped by higher impaired loan allowances (+14%).

Other key trends. Loans growth gained momentum to 6.7% YoY (3Q19: +5.6%) but deposits tapered slightly to 6.4% YoY (3Q19: +7.7%). However, loan-to-deposit ratio (LDR) was still at an elevated level of 93% (flat QoQ). As for asset quality, gross impaired loans (GIL) ratio inched down 8bp QoQ to 3.07% due to a larger loans base.

Outlook. Although NIM held steady this quarter, it will be challenged in 1Q20 by the recent OPR cut in Malaysia, accompanied by the still intense deposit rivalry landscape in Indonesia (due to tight liquidity). However, loans growth momentum is seen to maintain its strength, led by the two same countries (grab market share from rivals in Malaysia while in Indonesia, coming mainly from state-owned and infrastructure related corporate lending). As for asset quality, it should stabilize and improve since it has been steering its loan mix to sounder and less risky categories.

Forecast. Despite 4Q19 results being within estimates, we cut FY20-21 profit by 3% to factor in higher NIM slippage.

Keep BUY but with a lower GGM-TP of RM5.50 (from RM5.70), following our profit cut and based on 0.90x FY21 P/B (from 0.92x) with assumptions of 8.4% ROE (from 8.5%), 9.0% COE, and 3.0% LTG. This is largely in line to its 5-year mean of 0.98x and the sector’s 0.92x; the valuation is fair given its similar ROE output to those two comparatives. We are positive on CIMB as it is one of the very few domestic banks now with the ability to churn decent profit growth rate (4% vs sector: flat). Also, it provides one of the best values (pricing-wise) among larger banks.

Source: Hong Leong Investment Bank Research - 9 Mar 2020