CIMB’s 1H18 net profit was up 44% yoy, bolstered by asset disposal gains totalling RM1.1bn. Results were in line with Affin’s estimates but below market expectations, based on core net profit of RM1.05bn for 2Q18 and RM2.36bn (+3.3% yoy) for 1H18. Key earnings drivers include sharply lower provisions (-29% yoy) while deconsolidation of CIMB Securities International (CSI) resulted in lower overheads (-7.2% yoy) and a lower cost-to-income ratio of 51.3% (normalized) in 1H18 vs. 52.5% in 1H17. The 1H18 core operating profit was primarily offset by weaker net-interest income and non-interest income. The 2Q18 NIM was down 7bps qoq to 2.48%, but we expect it to stabilize at around 2.55% in 2H18 (with 5-10bps contraction yoy). We maintain our BUY rating and 12-month PT of RM7.50 (1.38x CY19E P/BV target).

1H18 Headline Net Profit +44% Yoy; Core Net Profit +3.3% Yoy

CIMB Group reported 1H18 net earnings of RM3.29bn (+44% yoy), while on a core basis, net profit was RM2.36bn (+3.3% yoy). Results were in line with our estimate but below consensus. 1H18 core pre-provision operating profit (-6.8% yoy) was affected by a weaker 2Q18 (-9.3% yoy; -5.4% qoq) as the Group was impacted by weaker fund-based income (2Q18: -5.1% yoy, flat qoq) and non-interest income (2Q18: -21% yoy, -22% qoq). In 2Q18, the group NIM was down 7bps qoq to 2.48% (due to upward repricing of domestic deposits and at CIMB Niaga). We expect the NIM to stabilize at around 2.55% (with 5-10bps contraction yoy) as CIMB Niaga will start repricing financing rates in 2H18. Meanwhile, 1H18 overheads were lower (-7.2% yoy), driven by deconsolidation of CSI. Impaired loan allowances continued to trend lower in 2Q18 (-45.5% qoq), down 29% yoy in 1H18 with an annualized net credit cost at 45bps vs. 66bps in 1H17.

Anticipating a Better Outlook in 2H18

We maintain our view of a better operating outlook in 2H18 for the banking sector and hence the CIMB Group, from the potential roll-out of more business-friendly policies under the new regime. This, we believe, will further boost business and consumer confidence in the country.

Maintain BUY, PT Unchanged at RM7.50 (1.38x CY19E P/BV)

Our Price Target remains unchanged at RM7.50 based on 1.38x P/BV target on the 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 a CIR of 49%. Downside risks: NIM pressure, and deterioration in asset quality.

Source: Affin Hwang Research - 30 Aug 2018