CIMB Niaga’s 2Q18 net profit was within our expectations. Declining provision expenses was however offset by a weaker topline, as net interest income continued to face NIM compression subsequent to the immediate repricing in deposit rates subsequent to the BI rate hikes (100bps in ytd-June18). The earnings outlook is expected to improve in 2H18 as loan rates are gradually being repriced upward though the operating environment will stay cautious in light of the upcoming presidential election. Reiterate BUY, PT at RM7.50.

CIMB Niaga’s 2Q18 Net Profit +20.4% Yoy; +1.6% Qoq

CIMB Niaga (Niaga) reported a 2Q18 net profit of Rp891bn (RM250m), up 20.4% yoy but rose by a marginal 1.6% qoq. For 1H18, net profit of Rp1,768bn (RM495.8m) was up 28% yoy. Overall results were in line with our expectations. In 2Q18, lower provision expenses (-33% yoy; -17.4% qoq; credit cost down 84bps yoy to 154bps) was the main driver while for 1H18, stronger non-interest income (from forex income) which rose by 32.6% yoy and a 27% yoy decline in provisions (credit cost eased by 68bps yoy to 167bps) were key earnings drivers. On the other hand, the cost-to-income ratio remains elevated at 49.4% in 1H18 while NIM remained under pressure (stood at 5.03% in 2Q18, -7 bps qoq and -12bps yoy). For 1H18, the average NIM stood at 5.09%, down 78bps yoy arising from the upward repricing of deposit rates.

Loan Growth Remains Subdued; Gross NPL Ratio Declined

CIMB Niaga’s loan growth has remained subdued at 3.0% yoy (due to a conscious move to reduce exposure to auto loans). Ex-auto loans, the outstanding loans grew by 5.8% yoy driven by corporate and commercial banks loans. Niaga’s outstanding gross NPLs remained flat at Rp6.3tr on a qoq basis and while on a yoy basis has declined sharply by 10.2%. The gross NPL ratio saw improvement from the corporate and SME segments, though offset by some rising stress in commercial loans.

Maintain BUY, PT Unchanged at RM7.50 (1.38x CY19 P/BV)

Maintain BUY with an unchanged Price Target of RM7.50, based on a 1.38x P/BV target on CY19E BVPS (underlying assumptions: 2019E 9.8% ROE and 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 CIR of 49%. Downside risks – weaker asset quality, NIM pressure.

Source: Affin Hwang Research - 15 Aug 2018