The 7-fold QoQ spiked in 1Q21 bottom-line was largely within expectations; this was due to positive Jaws, led by better NIM (+38bp), NOII (+50%), and lower loan loss provision (-28%). However, loans growth continued to decline and GIL ratio deteriorated. Overall, we make no changes to our forecasts. Although trading at an attractive price point and foreign shareholding level is at decade low, CIMB is still a riskier investment proposition among large-sized bank. Reiterate HOLD and GGM-TP of RM4.50, based on 0.77x FY21 P/B.

Broadly in line. CIMB Niaga (93%-owned) posted 1Q21 net profit of IDR996bn (+7- fold QoQ, -6% YoY). This was broadly within expectations, making up 30-32% of our and consensus full-year estimates; we believe the sharp improvement in net interest margin (NIM) is likely to reverse in quarters ahead while the exceptionally strong forex and derivative gains is not expected to repeat.

QoQ. The 7-fold spiked in bottom-line was thanks to positive Jaws (total income grew 12% while opex was flat) and lower loan loss provision (-28%). We saw NIM widened 38bp due to the drop in cost of funds as more deposits were repriced downwards and CASA built-up was stronger. Also, non-interest income (NOII) increased 50% on the back of abnormally high forex & derivative gains, which tripled, along with better fees & commission income (+41%).

YoY. Net profit fell 6% given the 62% rise in bad loan allowances. This was however cushioned by positive Jaws, again coming from better total income showing (+8%): (i) NIM widened 8bp, (ii) forex & derivative gains rose 56%, coupled with (iii) a 28% jump in profit from marketable securities.

Other key trends. Loans growth continued falling at a -10.7% YoY clip (4Q20: -10%) while deposits followed suit and declined at -1.2% YoY (4Q20: +6.1%). Sequentially, loan-to-deposit ratio ticked up 3ppt to 87%. As for asset quality, gross impaired loans (GIL) ratio climbed 40bp QoQ to 6.35%; this was primarily due to the deterioration in loans at risk, excluding segments impacted by Covid-19.

Outlook. Unlike some other countries in ASEAN, Indonesia’s Covid-19 cases seemed to be under controlled while its economy is gradually healing. Thus, we reckon there is slim likelihood of further rate cut. However, large proportion of Niaga’s deposits were repriced downwards and plans to expand its consumer and SME lending portfolio may lead to tapering NIM (but helps to improve asset quality). As for loans growth, we see it picking up pace in the next 6-9 months. Besides, loan restructuring efforts will help to limit a significant sag in NPL ratio; Otoritas Jasa Keuangan (a government agency that regulates and supervises the financial services sector) has prolonged the loan restructuring program until Mar-22 to support troubled borrowers.

Forecast. Unchanged as Niaga’s 1Q21 results were largely in line (it contributes c.20- 25% to group’s PBT); CIMB Group is poised to release its 1Q21 financials on 31 May.

Retain HOLD and GGM-TP of RM4.50, based on 0.77x FY21 P/B with assumptions of 6.2% ROE, 7.2% COE, and 3.0% LTG. This is beneath both its 5-year average of 0.91x and the sector’s 0.90x; we feel the valuation is fair given its ROE output is 1ppt below its historical and industry mean. While trading at an attractive price point (P/B at -1.0SD) and foreign shareholding level is at decade low, it is still a riskier investment proposition among large-sized banks, considering its less resilient asset quality.

Source: Hong Leong Investment Bank Research - 30 Apr 2021