After a meeting with management, we are of the view that CIMB Group’s 4Q18 results may not be exciting due to weaker net interest income and non-interest income generation, although provisions are improving (credit cost ~50bps). Meanwhile, 4Q18 NIM is expected to remain under pressure arising from weaknesses in Indonesia. We see a modest outlook for CIMB Group in 2019E (core net profit growth +2.2% yoy; core EPS -1.1% yoy), consistent with our macro view that confidence and business expectation remain cautious. Overall, the Malaysian operations will remain the key earnings driver for the Group in 2019, but we do not discount the likelihood of rate hikes by the Bank of Indonesia, of which is a dampener to CIMB Niaga’s shortterm NIM. Maintain HOLD, PT at RM6.10 (1.14x CY19E P/BV).

4Q18 Core Net Profit Expected to be In-line With Affin and Consensus

We are projecting a 4Q18 net profit of circa RM1.1bn for CIMB, and a FY18 normalized net profit of circa RM4.6bn, which is likely to fall within Affin’s and consensus estimates.

Shortfall in Net Interest and Non-interest Income Expected in 4Q18

CIMB Group is expected to see a shortfall in both 4Q18 and 2018 net interest and non-interest income. CIMB Niaga will likely see a NIM compression in 4Q18 (from 5.17% in 3Q18) arising from the rate hike in Nov18, with 2018’s NIM estimated to be circa 50-60bps lower yoy to 5.1%- 5.0%. Non-interst income will also likely see a decline (yoy and qoq) in 4Q18, largely due to poor performance of the treasury and markets division in Malaysia. To recap, the Group also saw weaker non-interest income in 2Q18, due to the heavy selldown of the Malaysian market after GE14.

Loan Growth Momentum in 2019 May Likely Taper-off

Though there were some drawdown for corporate loans in Malaysia in 4Q18 (mostly working capital lines), we understand from management that these were more likely pent-up demand in 2018 and is not an indicator of a broad-based capacity expansion in 2019. The Group, which saw fairly robust growth in Malaysia’s residential mortgages in 2018, may potentially see growth momentum tapering off in 2019. According to management, the Group is likely to meet its 2018 loan growth KPI of 6% as the Malaysian loanbook continued to outgrow the industry. For year-to-date 9M18, Malaysia’s loan growth (yoy) stood at 7.6%, Indonesia at -1.3%, Singapore at 14.5%, while Thailand (FY18) at 5.2%.

A Potential Slowdown in Indonesia Rate Hikes Will Ease NIM Pressure

As deposit rates reprice ahead of financing rates in Indonesia, CIMB Niaga suffered from a severe NIM compression throughout 9M18, amounting to - 62bps from 5.74% (9M17) to 5.12% (9M18) subsequent to six rate hikes totalling 175bps. A potential slowdown in the Indonesia’s rate hikes in 2019 will augur well for CIMB Niaga’s net interest income as it will gradually see the positive repricing impact of its loanbook. Nonetheless, the Indonesia Central Bank had reasserted that it would act to defend its exchange rate when needed through tightening initiatives in 2019.

Maintain HOLD, PT Unchanged at RM6.10 (1.14x CY19E P/BV)

Maintain HOLD with Price Target of RM6.10, based on a 1.14x P/BV target on CY19E BVPS (based on 2019E 9.3% ROE and 8.8% cost of equity). No revisions in our CIMB Group forecasts. For now, our 2019E key assumptions include loan growth at 4.2% yoy, NIM at 2.45%, credit cost at 53bps and CIR of 51%. Downside risk: deterioration in asset quality, higher overheads, weaker investment results. Upside risks: macro improvement and stronger loans growth.

Source: Affin Hwang Research - 24 Jan 2019