Period  2Q14/1H14

Actual vs. Expectations CIMB Niaga’s 1H14 PAT fell 9% YoY to IDR1,953b, coming in largely within street expectations (representing 46% of consensus’ full-year forecast).

 The lacklustre performance is attributable to a weak macroeconomic environment as investors were cautious ahead of the presidential election in early July.

Dividends  No dividends were declared.

Key Results Highlights

1H14 vs. 1H13

 CIMB Niaga’s PAT declined 8.5% YoY, no thanks to: (i) tepid NII growth (+4% YoY), (ii) lower fee income (-13% YoY), and (iii) higher provisions (+20% YoY).

 NIM was steady at 5% (-3bps YoY) but it may compress going forward given rising interest rate.

 Cost-to-income ratio increased to 52% (4ppts YoY) as general & administrative expenses rose 15% YoY.

 Gross impaired loans ratio increased to 3% (80bps YoY), suggesting that asset quality deteriorated. Besides, loan loss coverage also fell to 87% (-28ppts YoY).

 Loans (+9.1% YoY) grew at a slower pace vs. deposits (+10.6% YoY), causing LDR to fall 140bps YoY.

 Percentage of CASA to total deposits improved 60bps YoY, but it still makes up < 50% of total deposits.

 Annualised ROE dropped to 14.2% (-4ppts YoY) while regulatory capital ratios improved by 20-50bps YoY.

2Q14 vs. 1Q14

 Similarly, its quarterly PAT dropped 22% QoQ due to the same reasons highlighted above.

 The new regulation on bancassurance business (to be more transparent on commission collected), dragged down overall fee income (-9% QoQ).

 Cost-to-income ratio spiked 3ppts QoQ while cost of credit rose by 40bps QoQ, inline with the increase in NPL (gross impaired loans ratio +40bps QoQ).

 Loan loss coverage dipped 12ppts QoQ as NPL rises quicker than provisions.

Outlook  Rising interest environment likely to persist in 2H14 as inflationary pressure heightens – NIM compression from higher cost of funds.

 Loans growth may be tepid going forward given the uncertainties on how the new Government would intend to resolve the country’s macroeconomic issues.

 Management hinted that its cost of credit may increase further (say 80-100bps in FY14 vs. 70bps in 1H14).

Change to Forecasts No change to our forecasts.

Rating Maintain MARKET PERFORM

Valuation  TP of RM8.00 is maintained. This is derived based on a blended average of 1.8x FY15 PBV & 13.5x FY15 PE.

Risks to Our Call Tighter lending rules and further margin squeeze at group level.

 Macroeconomic slowdown in respective operating countries.

 Lacklustre trading sentiment from on-going mergertalks.

Source: Kenanga