The 18% QoQ rise in 2Q21 core net profit was broadly within expectations; this was due to lower loan loss provision (-28%). However, NOII was weak (-9%) and NIM contracted 7bp. Also, GIL ratio deteriorated slightly but the decline in loans growth has tapered. Overall, our forecasts were unchanged. Although trading at an attractive price point and foreign shareholding level is near decade low, it is still a riskier investment proposition among large-sized banks. Maintain HOLD and GGM-TP of RM4.60, based on 0.77x FY22 P/B.

Broadly in line. Excluding one-time intangible and fixed assets write off, CIMB Niaga (93%-owned) posted 2Q21 core bottom-line of IDR1,178bn (+18% QoQ, +71% YoY), bringing 1H21 sum to IDR2,174bn (+25% YoY). This was broadly within expectations, accounting for 60-63% of our and consensus full-year estimates; we believe the sharp rise in gains from marketable securities (MS) and loan recovery is not likely to repeat. Also, impaired loan provision is seen increasing again in subsequent quarters due to impact from Covid-19 headwinds.

QoQ. The 18% jump in core net profit was thanks to lower allowance for bad loans (- 28%). However, weak non-interest income (NOII, -9%) caused negative Jaws during the quarter; fees fell 6% while forex & derivative gains declined 67%. Also, net interest margin (NIM) contracted 7bp.

YoY. Core earnings spiked up 71% given positive Jaws (total income grew faster than opex by 7ppt) and drop in loan loss provision (-30%). At the top, NOII increased 25%, backed by fee income (+47%), MS gains (+33%), and loan recovery (+4-fold).

YTD. Similar to YoY trend, positive Jaws as a result from stronger total income growth (+9%) led core bottom-line to rise 25%. Opex and bad loan allowances only ticked up 1% and 5% respectively.

Other key trends. Loans contraction has tapered to -6.8% YoY (1Q21: -10.7%) while deposits picked up steam to +7.1% YoY (1Q21: -1.2%). Sequentially, loan-to-deposit ratio nudged down 7ppt to 80%. As for asset quality, gross impaired loans (GIL) ratio climbed 8bp QoQ to 6.43%; this was mainly due to the deterioration in manufacturing, trading, and service-related sectors.

Outlook. We expect NIM to hold steady at current levels since Bank Indonesia seems inclined to pause its monetary easing cycle to maintain a stable exchange rate. Also, their plan to focus growing the consumer and SME loans portfolio may improve asset quality but will likely prevent NIM from widening further. As for loans growth, it is seen to remain tepid for now as Covid-19 related woes drag near-term showing but should pick up pace 6-12 mths down the road. Separately, loan restructuring efforts will help to limit a significant deterioration 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 2Q21 results were largely in line (it contributes c.20- 25% to group’s PBT); CIMB Group is poised to release its 2Q21 financials on 27 Aug.

Retain HOLD and GGM-TP of RM4.60, based on 0.77x FY22 P/B with assumptions of 7.9% ROE, 9.4% COE, and 3.0% LTG. This is below both its 5-year mean of 0.90x & the sector’s 0.88x; we feel the valuation is fair given its ROE output is 1ppt beneath its historical and industry average. Although trading at an attractive price point (P/B at -1.0SD) and foreign shareholding is close to 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 - 2 Aug 2021