The 9-fold YoY jump in 3Q21 core net profit came in above estimates; this was backed by stronger total income growth (+8%) and lower loan loss allowances (- 41%). Also, the contraction in loans growth has narrowed. That said, sequential NIM slipped further and GIL ratio deteriorated. Overall, we raise FY21 earnings forecast up by 4% but keep FY22-23 unchanged. We still believe there are better risk-reward opportunities in other underappreciated, laggard, low beta banking stocks (which have similar recovery growth drivers) like Maybank (TP: RM9.40). Retain HOLD and GGM-TP of RM5.10, based on 0.84x FY22 P/B.

Beat estimates. Stripping away one-time intangible and fixed assets write off, CIMB Niaga (93%-owned) posted 3Q21 core bottom-line of IDR1,070bn (-9% QoQ, +9-fold YoY), bringing 9M21 total to IDR3,244bn (+74% YoY). This was ahead of estimates, making up 86-88% of our and consensus full-year forecasts; key deviation came from better-than-expected NOII and lower-than-expected allowance for bad loans.

QoQ. The 9% drop in core net profit was no thanks to negative Jaws (total income fell 4%) and higher loan loss provision (+6%). At the top, we note that NOII declined 20% due to weaker forex and derivative gains (-97%) together with smaller loan recovery (- 44%). Furthermore, net interest margin (NIM) contracted 21bp during the quarter.

YoY. Core earnings jumped 9-fold given positive Jaws (total income grew 8% on the back of 13bp NIM expansion coupled with a 3% NOII uptick) and lower impaired loan allowances (-41%).

YTD. Similar to YoY trend, positive Jaws as a result from stronger total income growth (+9%; NIM widened 7bp while NOII grew 14%) and lower provision for impaired loans (-15%), led core bottom-line rising 74%.

Other key trends. Loans contraction has tapered to -2.2% YoY (2Q21: -6.8%) while deposits picked up steam to +7.6% YoY (2Q21: +7.1%). Sequentially, loan-to-deposit ratio nudged down 2ppt to 78%. As for asset quality, gross impaired loans (GIL) ratio rose 49bp QoQ to 6.92%; this was mainly due to the deterioration in trading, service related, housing and consumer sectors.

Outlook. We expect NIM to hold steady at current levels since Bank Indonesia seems to have paused its monetary easing cycle, instead preferring to lean on other policies to boost domestic credit demand (loosening down-payment rules). Also, CIMB Niaga’s plan to focus growing the retail and SME loans portfolio may improve asset quality but prevents NIM from widening. As for loans growth, we see continuous gradual recovery over the next 12 months. Separately, loan restructuring efforts will help to limit drastic slump 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-23 to support troubled borrowers.

Forecast. We lift CIMB Group’s FY21 profit estimate by 4% to account for the better-than-expected Niaga results but keep FY22-23 unchanged.

Retain HOLD and GGM-TP of RM5.10, based on 0.84x FY22 P/B with assumptions of 8.4% ROE, 9.4% COE, and 3.0% LTG. This is below both its 5-year mean of 0.90x and the sector’s 0.91x; we feel the valuation is warranted given its ROE output is 1ppt beneath its historical and industry average. Since CIMB’s share price has performed strongly YTD, we prefer underappreciated, laggard, lower beta banking stocks (which have similar recovery growth drivers) like Maybank (TP: RM9.40) as it present better risk-reward opportunity.

Source: Hong Leong Investment Bank Research - 29 Oct 2021