CIMB Group’s upcoming 2Q18 results are not likely to be exciting, but we believe that earnings will remain steady. While net interest income and non-interest income will likely be weaker, we expect lower provisions yoy and qoq. Reaffirm BUY with an unchanged PT of RM7.50 (at a 1.38x CY19E P/BV). Downside risk should be capped by sound domestic operations (69-70% of group pre-tax profit).

Group Loan Growth Target at a Comfortable 6% Yoy

Management believes that chances of CIMB achieving its loan growth target of 6% (at Group level) remain good due to a better outlook in Malaysia (might even exceed target on potential pick-up in corporates, SMEs and mortgages). Loan growth in Singapore is also picking up while the environment remains challenging in Thailand and Indonesia due to upcoming elections. Management's mid single-digit target for Indonesia may be challenged due to a lack of demand in the corporate and SME space though retail loans (mortgages) are growing at a high single-digit.

Provisions May be Easing; Credit Cost Guidance of 55-60bps

We expect group level provisions to ease qoq and yoy. Malaysia, Indonesia and Thailand are likely to have performed better in 2Q18 – no new major accounts became NPLs while some recoveries are expected. CIMB Niaga’s credit cost was tracking down towards the 150bps level in 2Q18 (1Q18: 179bps). Management maintained its credit cost guidance of 55-60bps.

Net-interest-income (NII) and Non-interest Income May be Challenged

Management maintained its guidance for a 5-10bps contraction in the NIM for 2018 (vs. 2.63% in 2017), driven by CIMB Niaga’s weaker NIM outlook (potentially down 50bps to c.5% in 2018), while the outlook is expected to be steady in Malaysia, Thailand and Singapore. Non-interest income may have seen some pressure from a shortfall from fixed income activities, but this may be temporary owing to the slowdown in capital markets in 2Q18.

Maintain BUY and PT at RM7.50

Maintain BUY. Our Price Target remains unchanged at RM7.50 based on a 1.38x P/BV target on CY19E BVPS (underlying assumptions: 2019E 9.8% ROE, 8.4% cost of equity). For 2018E, our key assumptions include loan growth at 4% yoy, NIM at 2.55%, credit cost at 57bps and a CIR of 49%. Downside risks – further deterioration in asset quality, NIM pressure.

Source: Affin Hwang Research - 27 Jul 2018