1Q17: An Interesting Start

CIMB kicked off 1Q17 with RM1.18bn in net profit (+45% yoy, +38% qoq), in line with our estimate but outperforming the street’s. Key surprises are mainly the robust topline income growth driven by a 10bps increase in NIM yoy, strong loan growth in Malaysia, sharply higher investment gains and credit cost of 52bps, which came in below management’s guidance. Further improvement in asset quality (as NPLs had peaked in 4Q16) and operational synergies from the JV with China Galaxy are possible catalysts for further upside to our 2017-19E forecasts. Maintain BUY, PT raised to RM7.00 from RM6.30.

1Q17 Headline Net Profit +45% Yoy; Above Market Expectations

CIMB Group reported a 1Q17 net profit of RM1,180.3m, up 45% yoy and up 38% qoq with the key drivers being primarily a stronger topline while the group continued to achieve operational and asset quality improvements. Its 1Q17 net profit was in line with our 2017 forecast, though above the street estimate by 9%. No dividends were proposed for 1Q17 (1Q16: NIL).

Operating Results Driven by Stronger NIM; Credit Cost Eased

1Q17 pre-provision operating profit (PPOP) grew by 30% yoy, underpinned by: i) a robust 11.5% yoy growth in fund-based income (as NIM rose 10bps yoy to 2.72%, with robust loan growth in Malaysia); and ii) non-interest income, + 32% yoy. Though operating expenses grew in line with business growth, the cost-to-income ratio of 52.6% was in line with management’s guidance of <53%. Meanwhile, 1Q17 impaired loan allowances declined by almost 9% yoy and 44% qoq, with the annualized credit cost at 52bps (1Q16: 64bps; 4Q16: 93bps), bolstered by credit recoveries. Though management reiterated its official credit cost guidance of 60-65bps for 2017E, we believe that emerging tailwinds in the commodity markets will bolster recovery of assets classified as impaired in CIMB’s books.

Maintain BUY; Higher RM7.00 TP; FY17-19 EPS Forecasts Unchanged

Reiterate BUY on CIMB. As we roll forward our valuation horizon to 2018E, we revise our Price Target to RM7.00 (based on a P/BV multiple of 1.3x and 2018E ROE of 9.6%) from RM6.30 previously (P/B target multiple of 1.2x and 2017E ROE of 10.0%). Our higher target multiple of 1.3x remains below the past five-year average of 1.4x, and is justified by an improving macro outlook, likely further upside from asset quality improvement and cost synergies from the JV with China Galaxy, which reinforce our conviction of much stronger earnings prospects in 2017-19E. Our key earnings assumptions: i) steady NIM above 2.6% (against management’s guidance of a 5-10bps NIM compression to <2.6%); ii) 2017-19E loan growth target of 6-7%; iii) fund-based income growth of 5-6% p.a; and iv) easing credit cost from 74bps in 2016 to 53-56bps 2017-19E.

Downside risks: (i) deterioration in asset quality; ii) more volatility in provisions arising from the adoption of the FRS 9 accounting standard; iii) competitive pressure on rates; iv) NIM compression from wholesale funding pressure and as the bank complies with requirements under the net stable funding ratio (under Basel 3).

Source: Affin Hwang Research - 25 May 2017