1Q18 net earnings were up 10.6% yoy, while on a normalized basis it was 2.1% lower yoy. CIMB’s annualized core net profit was within our expectations but 10.4% below the consensus estimate (which in our view was overly optimistic). There was not much excitement in the 1Q18 results, with the key driver being lower provisions (credit cost down to 49bps in 1Q18 from 52bps in 1Q17) while deconsolidation of CIMB Securities International’s contribution resulted in an improved cost-to-income ratio of 49.8% in 1Q18 vs. 52.6% in 1Q17, in line with management’s T18 target of <50%. We raise our PT from RM7.30 to RM7.50 (based on 1.38x P/BV target) as we shift our valuation to CY19E, and upgrade our rating from HOLD to BUY on valuation.

1Q18 Headline Net Profit Up 10.6% Yoy; Core Net Profit Down 2.3% Yoy

CIMB Group reported a 1Q18 net earnings of RM1.3bn (+25.6% yoy); core net profit of RM1.15bn (-2.3% yoy) was in line with our estimate but below consensus. 1Q18 operating income declined by 1.3% yoy as fund-based income was weak (-3.5% yoy), impacted by weaker wholesale and commercial banking activities, though consumer banking remained the key driver. The positive NIM expansion of 4bps qoq in 1Q18 to 2.57% may not hold in the coming quarters due to margin pressure from Indonesia, though the 25bps rate hike announced on 30 May18 may provide some relief. Meanwhile, the stronger 1Q18 pre-tax profit of RM1.74bn (+8% yoy; +13.5% qoq) was driven by lower impaired loan allowances, with net credit cost down to 49bps from 52bps in 1Q17 and 71bps in 4Q17.

Manageable Capital Impact on MFRS 9 Day-1 Adoption

The adoption of MFRS 9 had a manageable impact of -70bps on the CET1 ratio on Day-1 (down from 12.2% in Dec17 to 11.5% on 1 Jan18), but it has edged up to 11.7% by 31 Mar18.

Upgrade From HOLD to BUY, PT Raised to RM7.50 (1.38x CY19 P/BV)

We upgrade CIMB from a HOLD to BUY, as the stock is currently trading at a steep 21% discount to our revised Price Target of RM7.50 (from RM7.30, based on an unchanged P/BV target of 1.38x on the CY19E BVPS (rolled forward from CY18E; underlying assumptions for 2019 of 9.8% ROE and 8.4% cost of equity). For 2018, our key assumptions include loan growth at 4% yoy, NIM at 2.5%, credit cost at 57bps and a CIR of 49%. Downside risks: NIM pressure, and deterioration in asset quality.

Source: Affin Hwang Research - 31 May 2018