Period  1Q14/FY14

Actual vs. Expectations The reported 1Q14 net profit of RM1,066.3m (-23.1% YoY or +2.7% QoQ) only accounted for 22.4% of consensus full-year estimate of RM4,756.8m and 22.3% that of ours at RM4,776.7m.

Dividends  None, as expected.

Key Results Highlights

1Q14 vs. 1Q13

 On a YoY basis, the group’s 1Q14 net profit declined 23.1% as 1Q13 numbers included exceptional net gains of RM265m (gains from sale of CIMB Aviva of RM515m less restructuring charges of RM200m and a tax impact of RM50m). If these gains were excluded, the Group would see only a 4.4% YoY increase in its earnings.

 Despite macro conditions improving in Indonesia, PBT contribution from Indonesia fell 9.9% in ringgit term. In ocal currency, Indonesia PBT contribution actually grew 3.4% YoY. On the other hand, strong growth was seen in Thailand and Singapore with their PBT contributions advancing 8.5% and 60.5%, respectively, in contrast to the Group PBT growth of 2.0% (excluding one-off P&L items in 1Q13).

 CIMB Group’s total income grew marginally at 3.0% thanks to a higher YoY growth of 9.0% in net interest income despite Islamic Banking Income dipping marginally by 2.7%.

 The higher growth in fund-based income was in line with the Group’s gross loans expansion of 11.9% YoY whish was pretty close to our estimate of 12.7% but below management’s target of mid-teen growth. This was due mainly to forex fluctuation. We understand that the Group’s total loans growth should registered at 14.0% after adjusting for currency fluctuation. Thus far, we understand that the loans growth was driven by higher overseas loans (+14.8% YoY) as opposed to domestic loans (+10.0% YoY). Loans to household/individual still commended the majority of loan share (48.1% of total loans) growing at a faster rate of 16.1% YoY. As usual, growth in this segment was driven by personal loan (+13.7%) and credit card (+15.4%). Other consumer loans such as residential mortgages (+10.9%) and auto financing (+3.6%) grew at slower paces.

 NIM, on the other hand, was well-defended with a marginal YoY dip of 3bps as the worst of margin contraction situation in Indonesia could be over.

 On customer deposits front, it dipped marginally by 1.0% YoY, pushing loan-to-deposit ratio (LDR) higher at 91.7% vs. 81.1% in 1Q13. Low-cost deposits (or CASA), in the meantime, grew at a faster rate at 5.2% and accounted for 35.8% of the total customer deposit (vs. 33.7% in 1Q13), which partly cushioned further erosions in NIM as well.

 Non-interest income was 5.0% lower due to softer Treasury & Capital markets activities.

 Operating expenses declined 9.4% due to the absent of RM200m restructuring cost in the first three months of the year. As a result, cost-to-income ratio (CIR) declined sharply to 56.9% from 64.7% in 1Q13. However, should we exclude such one-off merger cost from the first quarter of last year, the CIR should have recorded in the range of 56%-57% back then. Hence, the CIR of 1Q14 was almost on par with 1Q13.

 The Group’s total impaired loan allowances were 38.1% higher than 1Q13. Consequently, loan loss charge ratio spiked was higher at 19bps as opposed to 15bps in 1Q13 but it was still lower than our estimate of 30bps. This is not surprising as the Group’s gross impaired loans (GIL) ratio and loan loss coverage registered at 3.1% and 83.8%, respectively, as opposed to 1Q13’s 3.8% and 82.3%, respectively.

 Post completion of a private placement of equity share capital of RM3.55b in Jan14, CIMB Group’s Common Tier 1 (CET 1) capital ratio stood at 9.6% (vs. 8.0% as at end-Dec13), which is way above its internal target of 8.0% (to better cushion the impact of Rupiah depreciation). The Group’s Tier 1 and Total Capital ratios stood at 11.1% and 14.8% as at end-Mar14 vs. 9.7% and 13.7% as at end-Dec13.

 Annualised ROE registered at 13.0%, slightly below the Group’s ROE target range of 13.5-14.0% for 2014.

1Q14 vs. 4Q13

 QoQ, net profit of the Group grew 2.7% despite total income declining 7.0%.

 This was attributed to (i) lower operating expenses (-5.9%) despite higher CIR at 56.9% vs. 56.3% in 4Q13, (ii) lower loan loss allowances (-63.9%) with a much lower annualised credit charge-off rate of 19bps vs. 53bps in 4Q13.

Outlook  It was a decent start to the year given the weaker- than-expected capital market activities despite a handful of pipeline already in place.

 However, as the macro situation in Indonesia has been improving coupled with strong performance in Thailand and Singapore consumer & commercial banking businesses and with a decent outlook for the domestic financial market, we believe there is still a good chance for its earnings to play catch-up in the subsequent quarters.

 Management has shared their 2014 Targets, which are shown as follows: (i) ROE: 13.5%-14.0%, (ii)Total Stock Return: >FBMKLCI, (iii) Dividend payout ratio: 40%, (iv) Total loans growth: 14%, (v) Loan loss coverage: 35-40bps, (vi)Total Capital: >13%, and (vii) CET1: >8.5%.

Change to Forecasts      We maintain our FY15-FY16 earnings estimates at RM4,776.7m (+5.2%) and RM5,136.2m (+7.5%), respectively, for now.

Rating Maintain MARKET PERFORM

Valuation  We also maintain our Target Price (TP) of RM8.00.

 This TP represents a 1.8x to our FY15 BPS estimate or ~13.5x FY15 PER (which is in line with its 3-year PER average).

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