Period  3Q14/9M14

Actual vs. Expectations CIMB Niaga’s 9M14 PAT of IDR2,296bn (-29% YoY) was below expectations, representing only 60% and 54% of our and consensus’ full-year forecasts.

Dividends  No dividends were declared.

Key Results Highlights

9M14 vs. 9M13, YoY

 The poor showing is attributable to: (i) weak noninterest income as treasury and bancassurance fees fell (-22%), (ii) rising opex as a result of inflationary pressure (+6%), and (iii) higher loan loss provision on deteriorating asset quality (+78%).

 On the back of rising cost of funds, net interest margin (NIM) contracted 23bpts.

 Loans grew at a faster clip vs. deposits at 7% and 2%, respectively, causing loan-to-deposit ratio (LDR) to spike up to 100% (+5ppts). Notably, loans growth is below management’s target of +8-9% for FY14.

 Cost-to-income ratio (CIR) surged to 53% (+4ppts) as opex inched up while income base shrunk.

 Asset quality dipped given that: (i) gross impaired loans ratio increased to 3.4% (+1ppts), (ii) loan loss coverage dropped to 83% (-28ppts), and (iii) credit charge ratio rose to 1.2% (+50bpts).

 Annualised ROE fell to 11% (-7ppts) while regulatory capital ratios were stable.

3Q14 vs. 2Q14, QoQ

 Due to the same reasons above, quarterly earnings declined by 60%.

 Despite rising cost of funds, NIM compression was arrested due to better loan repricing.

 LDR was flat at 100% as loans and deposits ticked up in tandem (+1%).

 CIR increased 1ppts given smaller income base.

 Asset quality indicators continue to slide due to poor credit recovery from coal related borrowers. We gathered that coal prices had fallen >50% YTD and this had affected its customers’ repayment capability.

Outlook  Otoritas Jasa Keuangan (OJK)’s ruling to cap interest rates on deposits mitigate the risk of higher funding cost. In turn, this provides some short-term relief to NIM pressure.

 Further deterioration in asset quality due to rising inflationary environment.

 Loan growth is expected to be tepid for the next few quarters given uncertainty in the country’s policies.

Change to Forecasts

 No change to our conservative forecasts for now, pending CIMB Group’s results release on 18 Nov 2014. CIMB Niaga contributed 26% to group’s PBT in 1H14.

Rating Maintain OUTPERFORM

Valuation  Target price of RM7.15 is unchanged, based on 1.6x FY15 P/B.

Risks to Our Call

 Further margin squeeze from stronger-than-expected competition.

 Slower-than-expected loan growth and deterioration in asset quality.

 Adverse currency fluctuations.

Source: Kenanga