Period  3Q13/9M13

Actual vs. Expectations The reported 9M13 net profit of RM3,502.1m is in line with our expectations of RM4,751.1m (73.7%) but slight above the consensus estimate of RM4,403.0m (79.5%) despite weaker operating environment in 3Q13 and tough condition in its Indonesian operations.

 The annualised 9M13 ROE of 16.0% is in line with management target.

Dividends  No dividend was declared for the quarter, as expected.

Key Result Highlights 9M13 vs. 9M12: Net profit grew 7.3% YoY, in line with its net interest income (+7.6% YoY) despite loan base growing by 13.7%. The slower net interest income growth as opposed to loans was due mainly to a NIM compression of 21bps (9M13: 2.87%, 9M12: 3.08%) especially at CIMB Niaga Level (due to the sharp rise in Rupiah deposit cost).

 The gross loan growth rate of 13.7%, which was slightly above our estimate of 13.0% but slightly lower when compared to management guidance of 15%. As such, there is a risk of weaker growth going forward. Thus far, we understand that the stronger loans growth was driven by Retail Term Loans (+29.9% YoY), Retail Enterprises (+52.0%) and Commercial Banking (+20.5%).

 Total Group customer deposits grew by 13.2% YoY, with LDR registering at 84.8% (vs. 83.8% in 9M13). Low cost deposits (or CASA), in the meantime, was relatively stable at ≈35% of total customer deposit, which cushioned further erosions in NIM.

 The Islamic banking income, however, declined 11.5% despite a 12.9% growth in its financing activity, which accounts for 16.7% of total Group’s loans. This was due to lower Islamic capital market activities.

 The non-interest income also declined 1.1% YTD due to challenging operating conditions at the Investment Banking segment. Investment Banking PBT declined by 9.4% YoY due to the absence of mega Malaysian IPOs which it enjoyed last year compounded by weaker market conditions. Besides, slower treasury flow, especially in Indonesia was also partly caused a weaker set of noninterest income results.

 Cost-to-income (CIR) was relatively high at 61.0% (vs.55.8% in 9M12) due to merger cost of Royal Bank of Scotland (RBS), including expenses for MSS). Excluding one-off items and RBS, the CIR should have been 56.1%.

 The Group’s total loan impairment of RM352.1m in 9M13 was 27.2% higher than the RM276.8m in 9M12 due to higher provisions at CIMB Niaga and Malaysia-Singapore Consumer Banking Divisions as well as lower recoveries. The Group’s total credit charge was 0.21% in 9MFY13 (vs. 0.19% in 9M12), which is well below its original estimate of 0.40%.

 The net impaired loans ratio and loan loss coverage were registered at 3.5% and 82.2%, respectively, in contrast to the industry average of 1.4% and 97.6%. The subindustry asset quality and reserve ratios could suggest higher loan loss provision ahead.

 The lower-than-statutory taxation of 22.0% (as opposed to 24.2% in 9M12) also boosted the bottom-line.

Key Result Highlights 3Q13 vs. 2Q13: The net profit grew marginally at 0.7% QoQ due to flattish total income growth of 1.1%.

 The Group’s Consumer Banking PBT was 7.2% lower QoQ. The Malaysia-Singapore consumer bank PBT declined 10.6% QoQ as improved revenue was offset by higher provisions during the period. Wholesale Banking PBT was 3.1% lower QoQ at RM659m largely due to the weaker Investment Banking PBT in line with the softer capital markets. Treasury & Markets PBT improved 23.9% Q-o-Q while Corporate Banking was 2.9% lower. PBT from Investments was 94.3% higher QoQ as the Group recognized most of its gains from the listing of Tune Insurance Holdings Bhd.

 Operating expenses were stabilised at approximately 59.1% (vs. 59.3% in 2Q13). As mentioned earlier, the sticky CIR was due to expenses arising from mergers and acquisition costs.

 Lower loan loss provision jumped almost 2-fold to RM200.4m as opposed to RM71.0m in 2Q13 (+182.1% QoQ). As a result, the annualised credit charge ratio surged 0.36% vs. 0.13% in 2Q13. To recap, the higher provision was due to lower recoveries and higher provisions required at CIMB Niaga as well as Malaysia-Singapore Consumer Banking Divisions.

 CIMB Group’s total capital ratio stood at 14.0% (vs. FY13 Target of >11%) while its Tier 1 capital ratio stood at 10.0% as of 30 September 2013. CIMB Group’s double leverage and gearing stood at 114.0% (vs. FY13 Target of <200%) and 15.7%, respectively, as of end-September 2013.

Outlook  Despite a challenging operating environment, the management guided for market recovery in 4Q13 as the Group has seen a surge in capital markets transactions and continued positive momentum in all markets except for Indonesia, thus far. As such, 4Q13 top-line should be stronger led by Investment Banking, Malaysia-Singapore Consumer Banking and Regional Corporate Banking. However, growth in CIMB Niaga’s contribution will remain muted. Debt Capital Market is expected to do better but Treasury & Markets as a whole will still need to navigate the underlying volatile markets.

 The management also guides for additional MSS provisions to be made in 4Q13 and they also expect final settlement for Thai Asset Management Corp. (TAMC) to be completed by then. While the management did not commit any ROE KPI for 2014, its FY13 ROE KPI remains unchanged at 16%.

Change to Forecasts We maintain our FY13E and 14E net profit forecasts of RM4,751.1m and RM5,127.1m, respectively.

 However, we see risk of downwards revisions should: (i) loans growth momentum and (ii) credit cost continue to deteriorate from here.

Rating & Valuation Our view remains unchanged. We only rate the stock as MARKET PERFORM until the afore-mentioned concerns are cleared.

 We maintain our Target Price of RM8.10, ~9.2% upside from here, which is based on a targeted FY14 P/BV of 1.8x, representing -1.5SD below the 3-year P/BV average, against our unchanged FY14 BV of RM4.50.

Risks to Our Call  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