CIMB Niaga’s 3Q17 and 9M17 net profit rose by 45% yoy and 69% yoy respectively on improved operating income and lower loan loss provisions (with credit cost stabilizing around 230bps). CIMB Niaga’s 3Q17 results came in within our expectations. In our view, CIMB Niaga’s earnings growth is expected to moderate as NIM may come under pressure while provisions are likely to remain elevated (which has been priced into our FY17-19 forecasts). Reiterate HOLD on CIMB with a PT of RM6.65 based on a CY18E P/BV target of 1.25x.

CIMB Niaga’s 3Q17 Net Profit +45% Yoy; +10% Qoq

CIMB Niaga (Niaga) reported a 3Q17 net profit of Rp817bn (RM255m), up 45% yoy and 10.3% qoq, while its 9M17 net profit was Rp2,197bn (+69% yoy), in line with our expectations. The key driver to the earnings recovery was a decline in 9M17 provisions (-16.4% yoy), as the credit cost edged down from 273bps in 2016 to 234bps for 9M17. For 9M17, Niaga’s preprovision operating profit rose 9.2% yoy on expansion in net interest income (+5.4% yoy) and non-interest income (+3.6% yoy). The 9M17 NIM, which rose by 20bps to 5.74% (on lower funding cost), has started to see some pressure (-55bps qoq) due to downward repricing of loan rates given the BI rate cuts (partially mitigated by CASA growth of 6.2% yoy).

Outstanding NPLs Stable Qoq, But Impaired Loans Creeping Up Qoq

Niaga’s outstanding gross non-performing loans (NPLs) remained steady as at 3Q17 at Rp7.06tr (gross NPL ratio at 3.95% vs. 3.89% in 2Q17), while impaired loans crept up on a qoq basis from Rp9bn to Rp9.4bn. This was due to some stress in the corporate and commercial loans. In our view, Niaga’s credit cost may stay elevated above the 200bps threshold while potential recoveries may be slim, due to weakness in the domestic economy.

Maintain HOLD, PT Unchanged at RM6.65 (at 1.25x P/BV)

We reiterate our HOLD rating, with a 12-month Price Target of RM6.65 (at a P/BV target multiple of 1.25x applied to the CY18 BVPS of RM5.30), based on a 2018E core ROE assumption of 9.2% and cost of equity of 8.4%. Our 2017-19 forecasts are underpinned by: i) fund-based income growth of 2.9-3.5% p.a. on loan growth of 1.8-4.0%; ii) steady NIM at 2.6- 2.63%; and iii) credit cost at 64bps 2017E, 57bps 2018E and 52bps 2019E. Downside risks – NIM pressure. Upside risks – credit recoveries.

Source: Affin Hwang Research - 1 Nov 2017