CIMB’s 3Q17 net profit of RM1.13bn grew by 10.7% yoy, but only 2.7% qoq. 9M17 net earnings were in line with our and consensus estimates. Though 9M17 PPOP saw a favourable growth of 18% yoy (consumer, wholesale banking), the overall 9M17 provisions were still elevated and remained flat yoy (owing to unexpected provisions which hit Thailand, auto/SME sectors in Indonesia and O&G sector in Singapore in 3Q17). We believe that 4Q17 may see some downside risk on earnings due to NIM pressure and provisions. Maintain HOLD and PT at RM6.65.

9M17 Headline Net Profit +26.0% Yoy; in Line With Expectations

9M17 net earnings (+26% yoy) were in line with our and consensus estimates, supported by robust fund-based income growth (+11.7% yoy) as group NIM rose higher (+6bps yoy to 2.67%) driven by group loan growth of 7.0% yoy (flat year-to-date due to corporate repayments in 2Q17) and re-pricing of the Malaysian mortgage portfolio. Profits were capped, however, by the elevated 9M17 allowances, which declined by only 3% yoy (credit cost at 68bps vs. 73bps in 9M16). Nonetheless, fund-based income growth appears to be cooling off sequentially (-2.2% qoq) as reflected by a 11bps contraction in CIMB’s 3Q17 NIM to 2.6% though overall 3Q17 net profit was supported by an expansion in non-interest income (+14.7% qoq) and a decline in impaired loan allowances (-5.7% qoq).

Risks to 4Q17 Earnings - Further NIM Pressure, Elevated Provisions

In our view, CIMB may potentially see some risks to earnings in 4Q17 arising from on-going NIM pressure emanating from CIMB Niaga (given the BI rate cuts which had led to a repricing of loan rates). Meanwhile, with the challenging operating environment in Thailand and Indonesia, we believe that provisions in 4Q17 will remain elevated as well.

Reaffirm HOLD, PT Unchanged at RM6.65 (1.25x CY18 P/BV)

We Reiterate Our HOLD Rating on CIMB, With An Unchanged 12-month Price Target of RM6.65, based on a target P/BV of 1.25x on CY18 NBVPS (underlying assumptions: 2018E 9.2% ROE and 8.4% cost of equity). Our assumptions remain unchanged for 2017-19E: i) fund-based income growth of 2.9-3.5% p.a. based on loan growth of 1.8-4.0%; ii) NIM at 2.6- 2.63%; and iii) impaired loan allowances at RM1.8-2bn. Downside risks – deterioration in asset quality, NIM pressure. Upside risks – improved operating efficiencies, stronger loan growth.

Source: Affin Hwang Research - 29 Nov 2017