The 12% YoY rise in 1Q20 bottom-line was largely within expectations; this was due to positive Jaws, led primarily by better NOII and strict cost control. Also, loans growth held steady. However, NIM continued to dwindle and GIL ratio has inched up again. Forecasts were unchanged. Despite headwinds at the group’s O&G book (which does not help sentiment), we would rather see the elephant in the room being addressed this year and followed by a meaningful subsequent recovery in FY21. We still like CIMB for its inexpensive valuations (trading >- 2SD P/B and below GFC’s level). Retain BUY and GGM-TP of RM4.45, based on 0.72x FY21 P/B.

Largely within expectations. CIMB Niaga (93%-owned) registered 1Q20 earnings of IDR1,055b (+9% QoQ, +12% YoY). This was largely within our expectations, making up 35% of our full year forecasts but came in below consensus (26%); we believe loan loss provision will rise in subsequent quarters due to the impact of Covid-19 crisis.

QoQ. The 9% rise in bottom-line was thanks to positive Jaws (opex fell 2% from strict cost control) and lower loan loss allowances (-2%). Total income grew only a meagre 2% as net interest margin (NIM) contracted 12bp due to downward loan repricing. We note that non-interest income (NOII) jumped 10% mainly because bancassurance, forex and derivative gains (FX & derivatives) tripled.

YoY. Net profit rose 12% on the back of stronger total income performance (+4%) as NOII spiked 12%; this was fuelled by: (i) FX & derivatives (+2-fold), (ii) bancassurance (+22%), along with (iii) gains from marketable securities (+29%). Also, the decrease in opex (-3%) lifted earnings. However, bottom-line growth was capped by the 9% surge in bad loan provision.

Other key trends. Loans growth was steady at 3.3% YoY (4Q19: +3.1%) but deposits picked up pace to 6.3% YoY (4Q19: +2.5%). As a result, loan-to-deposit ratio fell 3ppt to 96%. While for asset quality, gross impaired loans (GIL) ratio saw a deterioration of 29bp QoQ to 4.10% (non-performing loans creeping up across the board).

Outlook. Similar to every other country in the world, Indonesia will be economically hit by the Covid-19 crisis in FY20. Loans growth is expected to taper and the multiple rate cuts (2x so far this year) will continue to exert pressure on NIM; however, Niaga’s focus to grow CASA could help to prevent a sharper NIM erosion. Also, we see asset quality weakening further; that said, non-performing loans is unlikely to spiral out of control (at least for this year) since Otoritas Jasa Keuangan (government agency that regulates and supervises the financial services sector) has relaxed the debt quality assessment and restructuring requirements on affected borrowers.

Forecast. Unchanged as Niaga’s 1Q20 results were largely in line (it contributes c.20- 25% to group’s PBT); CIMB Group is poised to release its 1Q20 financials on 21 May.

Retain BUY and GGM-TP of RM4.45, based on 0.72x FY21 P/B with assumptions of 7.3% ROE, 8.9% COE, and 3.0% LTG. This is largely in line to the sector’s 0.76x but below its 5-year average of 0.96x; we feel the valuation is fair given its similar ROE output to peers but 1ppt below historical mean. While the flurry of bad news from its oil & gas exposure does not help sentiment, we are comforted the balance performing loans in this book is only a meagre c.1%. Since FY20 is already challenging, we would rather see the elephant in the room being addressed this year followed by a meaningful subsequent recovery in FY21.

Source: Hong Leong Investment Bank Research - 12 May 2020