The CIMB Group saw a 1Q19 net profit of RM1.192bn (-8.7% yoy due to the absence of huge asset disposal gains) while core net profit stood at RM1.176bn (+2% yoy). The 1Q19 results were in line with our and market estimates. Impaired loan allowances continued to decline (-25% yoy) while the credit cost declined 15bps yoy to 34bps in 1Q19. The quarter also saw CIMB facing flat operating income due to modest fund-based income growth (+4.3% yoy) and a decline in non-interest income (weak capital market returns). Maintain HOLD, with a revised PT of RM5.65 (0.96x CY20E P/BV target).

1Q19 Core Net Profit Grew 2% Yoy; Core Operations Weak Yoy

CIMB recorded a 1Q19 net profit of RM1,192m (-8.7% yoy) while core net profit was up 2% yoy and 5.3% qoq. In our view, the underlying operating income remains weak, as non-interest income declined 14% yoy while supported by a marginal expansion of fund-based income (+4.3% yoy). NIM for the period, although down 9bps yoy to 2.48%, stabilized on a qoq basis with a 3bps improvement (due to loan rate repricing in Indonesia). Funding cost pressure continued in 1Q19 (+15.7% yoy) as deposit growth was robust at 5.6% yoy. Loan growth was 7.6% yoy, with consumer banking loans up 7.7% yoy, commercial banking at +6.4% yoy and wholesale banking at +8.1% yoy. 1Q19 CIR stood at 55.3% vs. 49.8% in 1Q18 (4Q18: 55.7%) and was elevated by overheads related to the Forward23 initiative (strengthen IT infrastructure and upskill workforce).

A More Cautious Outlook in 2019; Domestic Fundamentals Resilient

We anticipate a moderation in business activities in 2019, in Malaysia (due to the global trade slowdown and geopolitical uncertainties) and Indonesia (post-General Election). On a more positive note, CIMB’s asset quality has remained steady, with the GIL ratio at 3.0% in 1Q19 and 2019’s credit cost expectation at 40-45bps. The 25bps OPR cut remains manageable, on a full-year basis at circa 2-3bps on NIM and RM100- 200m on net interest income.

Maintain HOLD. PT Revised Down to RM5.65 From RM6.10

Maintain HOLD. We lower our Price Target to RM5.65, based on a 0.96x P/BV target on CY20E BVPS (2020E 8.8% ROE and 9.0% cost of equity), from RM6.10 (1.1x P/BV target on CY19E BVPS). Our 2020 assumptions include loan growth at 4.2% yoy, NIM at 2.45%, credit cost at 53bps and CIR of 51%. Downside/upside risks: Further/lower NIM pressure.

Source: Affin Hwang Research - 30 May 2019