CIMB Niaga (Niaga) saw a robust 1Q20, with net profit of IDR1,055bn (RM306m) rising by 11.8% yoy and 9.2% qoq, driven by robust noninterest income amidst flat fund-based income growth (yoy and qoq). Results were within our expectations. Key takeaways from the results and con-call:- i) NIM trended lower, but is expected to normalize next quarter (guidance at ~5.0% for 2020); ii) though loans grew by 3.3% yoy, the full year is expected to stay flat; iii) though 1Q20 net credit cost of 151bps improved yoy and qoq, it is likely that it may go above 200bps in 2020. Management’s outlook for 2020 has turned more cautious vis-à-vis a more optimistic view in 4Q19, largely due to headwinds from COVID-19. Reiterate SELL call and TP of RM2.60.

A Decent 1Q20 Underpinned by Non-interest Income Growth

At the operating level, Niaga had decent 1Q20 operating income IDR4.2tn (+3.7% yoy; +1.9% qoq), partly bolstered by strong non-interest income of IDR1.15tn (+11.5% yoy and +10.4% qoq; bumped up by FX & derivatives gains) while net interest income was up 1.0% yoy but down 0.9% qoq (due to the impact of the 2 rate cuts in 2020). The NIM, which declined 26bps yoy and 12 bps qoq, may start normalizing in the next quarter driven by initiatives to boost CASA growth and the repricing down of deposit rates.

Management’s Guidance on Outlook Turns More Cautious

During the conference-call, Niaga’s management turned more cautious and uncertain about the outlook for 2020, as headwinds emanating from the COVID-19 pandemic have caused various businesses to ask for loan rescheduling and restructuring. Niaga’s loanbook, which saw an expansion in consumer loans in 1Q20, may see weaknesses in the SME/commercial space and at best, stay flat yoy. Credit cost in the subsequent quarters is likely to rise, led by the commercial/SME accounts as well as the consumer books due to higher unemployment rate.

Reiterating Our SELL Call on CIMB and TP of RM2.60

We reiterate our SELL rating with a lower 12-month Target Price of RM2.60, based on 2020E target P/BV of 0.46x (2020E ROE of 6.2% and cost of equity of 8.6%). We maintain our 2020-22E earnings, in which we have factored-in a recessionary outlook for the Group in 2020E, including flat loan growth, NIM at 2.3% and credit cost at 75bps. Upside risks: ease in NIM pressure, and a faster-than-expected economic recovery.

Source: Affin Hwang Research - 12 May 2020