Period  2Q13/1H13

Actual vs. Expectations  The reported 1H13 PAT of RM2,440.4m is in line with market and our expectations of RM4,769.2m (51.1%) and RM4,733.9m (51.6%), respectively. Annualised, the ROE came up to 16.6% which concurs with management target of 16%.

Dividends  Declared a 1st interim NDPS of 12.82 sen per share to be paid in the form of cash or an optional Dividend Reinvestment Scheme (“DRS”), representing a dividend payout ratio of 40.0% of 1H13 profits. Again, this is in line with management guidance and our expectations on a core net profit basis.

Key Result Highlights

1H13 vs. 1H12:  In a nutshell, net profit grew 15.1% YoY with one-off gains on sales of 51% stake in CIMB Aviva (~RM515m) but less restructuring charges (RM200m). Excluding these one-off items in 1Q13, net profit in 1H13 would have been flat YoY (+0.2%). Note that the consensuss and our FY13 earnings forecasts have already factored in these one-off items.

 On the topline, net interest income grew 7.5% YoY on the back of gross loan growth of 11.4%, which was slightly below management guidance of 15% and 13% of our expectation. The slower-than-expected loan growth was partly due to contraction in Indonesian corporate loan book. The slower growth in net interest income was particularly hit by further reduction in NIM of 21bps YoY (1H13: 2.88%, 1H12: 3.09%).

 Total group customer deposits grew by 14.1% YoY, raising LDR slightly to register at 85.3% (vs. 83.8% in 1H12) mainly driven by corporate & treasury as well as commercial banking deposits. Retail deposits were only 9.2% higher YoY. Low cost deposits (or CASA), in the meantime, remain relatively stable at ≈34% of total customer deposit.

 The 1H13 non-interest incomes grew marginally by 4.5% YoY due to challenging operating conditions at its investment banking division (absence of mega IPOs after a bumper season last year) and the treasury market operations (lower FX spreads especially in Indonesia and rapid bond yield rise in late-2Q13).

 In addition, net income from Islamic banking also declined 7.9% due to lower Islamic capital markets activity. On the credit growth front, CIMB Islamic’s gross financing assets, in fact, grew at a faster rate of 13.2% YoY, accounting for 15.4% of total Group’s loans.

 Cost-to-income (“CIR”) was relatively high at 59.1% (vs. 55.3% in 1H12) due to merger cost of RBS, including expenses for MSS). Excluding the merger cost, the CIR should be at 56.1%, which is still above our estimate of 52%.

 The Group’s total loan impairment/provision declined by 22.1% YoY from the RM195m in 1H12 due to continued write-backs and recoveries. As such, the annualised credit charge was at 0.14% in 1H13 vs 0.20% in 1H12. The Group’s gross impairment ratio improved to 3.6% for 1H13 from 4.4% in 1H12, with an allowance coverage ratio of 82.1% (vs. 82.3% in 1H12). This coverage ratio was lower than the industry average of 99.8% as at endJune13.

 The lower than statutory taxation of 20.3% (as opposed to 24.0% in 1H12) also helped to boost the bottom-line.

2Q13 vs. 1Q12:  The net profit in 2Q13 declined 23.9% QoQ due to the one-off net gains of RM315m (gains on sales of CIMB Aviva of RM515m less restructuring charges of RM200m) in 1Q13 which resulted in a higher base effect.  NIM was flat at 2.88% for the last 2 quarters and gross loan grew 3.7% QoQ. As a result, net interest income grew 4.2% QoQ.

 However, non-interest income dipped 6.2% due to the volatile capital and treasury markets as well as a dry spell in mega IPOs during the quarter.

 Operating expenses only increased marginally by 1.1% QoQ. As mentioned earlier the steep CIR (2Q13: 59.3%, 1Q13: 58.9%) was due to expenses arising from mergers and acquisition costs.

 Operating income was cushioned by lower loan loss provision of RM71.0m vs. RM80.7m in 1Q13 (-12.0% QoQ). The annualised credit charge was lower at 0.13% vs. 0.15% in 1Q13.

Outlook  Management has guided for a challenging operating environment going forward due to weakening external macro economic environment and markets.

 While investment banking pipeline is expected to remain strong, the management does not rule out potential delays in roll-outs due to the volatile equity market conditions. Similarly, the outlook for Treasury Markets is also cloudy due to prevailing market turbulence.

 However, Regional Corporate Banking, Malaysia & Singapore Consumer Banking, and CIMB Thai can depend on their current momentum to continue to do well in 2H13.

 The prospect of CIMB Niaga, on the other hand, hinges on the issues of rising NPLs and depreciation in Rupiah. Besides, any further hike in the Indonesian benchmark interest rates could potentially dampen its growth prospect.

 While the management continue to maintain their 16% ROE target, we believe it could be an uphill task owing to the above mentioned reasons.

 Note that the above-mentioned concerns could potentially hit (i) CIMB Niaga, (ii) CIMB Investment Bank and (ii) CIMB Securities Group the most. Thus far, we have seen their PBT contributions to the Group weakening to 28.5% in 1H13 from to 36.1%.

Change to Forecasts  While we maintain our FY13-FY14E net profit forecasts of RM4,751.1m-RM5,127.1m, we see risk of downwards revisions.

Valuation  As such, we reckon that the stock could undergo a period of de-rating until the aforementioned concerns are cleared.

 Hence, we have lowered our previous targeted FY14 P/BV of 1.9x to 1.8x, representing -1.5SD below the 3-year P/BV average.

 Based on our unchanged FY14 BV of RM4.50, we have revised down our Target Price (“TP”) to RM8.10 (from RM8.60 previously).

Rating   Maintain MARKET PERFORM

 Our MARKET PERFORM rating on CIMB is maintained as the stock could only offer ~8% upside from here.

Risks  Tighter lending rules and further margin squeeze in general.

 Tougher operating environment especially in investment banking and treasury market.

 Deterioration in Indonesian Rupiah and NPLs as well as further rise in interest rate.

Source: Kenanga