CIMB Thai’s 9M17 net profit was plagued by higher impaired loan allowances (primarily due to commodity-related SME accounts) while operating expenses in 3Q17 saw some one-off business rationalisation expenses. Operating income should normalize in 4Q17 though downside risk is still on the asset quality front. Maintain BUY on CIMB Group, with a TP at RM7.50. We remain upbeat on CIMB’s prospects in 2017-19E, as the group continues to focus on initiatives to boost ROE in the absence of major impairments and hefty provisions.

CIMB Thai’s 3Q17 a Drag on Net Profit

The CIMB Group’s Thai unit, CIMB Thai, saw 3Q17 net earnings decline significantly by 82% yoy and 78.5% qoq to THB76.5m (RM9.8m), largely due to high impaired loan allowances. For 9M17, net profit was also down by 30.6% yoy to THB554.4m (RM70.7m), affected by: i) an increase of 9.8% yoy in impaired loan allowances (credit cost increased from 228bps in 9M16 to 234bps in 9M17); and ii) one-off business rationalisation expenses of THB79.9m incurred in 3Q17, resulting in 9M17 operating expenses at +2.3% yoy (otherwise would be flat yoy). 9M17 net interest income was up 3.6% yoy (largely due to lower funding costs, reflected by a +12bps yoy in 9M17 NIM to 3.88%) while overall non-interest income was down by 32.8% yoy arising from lower trading/investment gains as well as forex transactions. As at Sep 17, gross loans grew 2.1% from end-2016.

Asset Quality Improved After the Sale of NPLs in Jan 2017

Subsequent to the sale of NPLs (completed in Jan 2017), CIMB Thai‘s gross NPL ratio improved from 6.1% in 2016 to 5.7% in Sep 17, while loan loss cover increased to 85.1% at end-3Q17 from 77.3% at end-4Q16.

Maintain BUY and TP of RM7.50; FY17-18E EPS Remain Unchanged

Reiterate BUY on CIMB, with an unchanged 12-month target price of RM7.50, based on a target P/BV of 1.4x, assuming 2018E ROE of 9.7% and cost of equity of 8.3%. Overall, we remain optimistic on CIMB’s prospects in 2017-19E, with expectations as follows: i) steady NIM above 2.6% (vs. management’s guidance of a flat year against 2.63% in 2016); ii) fund-based income growth of 5-6% p.a.; and iii) impaired loan allowances of RM1.8bn-2.0bn. Downside risks – further deterioration in asset quality, market competition on rates and NIM pressure.

Source: Affin Hwang Research - 20 Oct 2017