Period

1Q15

Actual vs. Expectations

CIMB Niaga’s 1Q15 PAT of IDR83bn (-92% YoY) was below expectations, representing only 2-3% of our and consensus’ full-year forecasts.

The steep shortfall was primarily due to: (i) a pullback in non-interest income growth and (ii) provision for bad loans exceeded estimates.

Dividends

No dividends were declared.

Key Results Highlights

1Q15 vs. 1Q14, YoY

The weak set of numbers was due to: (i) a sharp fall in non-interest income as treasury and bancassurance fees had fallen (-40%), (ii) higher opex as a result of rising personnel cost and admin expenses (+10%), along with (iii) burgeoning loan loss provision (+620%).

Net interest margin (NIM) expanded 9bpts on the back of lower cost of funds.

Loans grew at a slower pace vs. deposits at 10% and 13%, respectively. In turn, loan-to-deposit ratio (LDR) fell 3ppts to 97%.

Cost-to-income ratio (CIR) nudged up 4ppts to 54% as opex rose 9% while income base was relatively flat.

Asset quality deteriorated as: (i) gross impaired loans ratio (GIL) increased to 4% (+2ppts) and (ii) credit charge ratio rose to 3% (+3ppts); this was due to bad loans related to its coal exposure.

We understand that: (i) 4-5% of CIMB Niaga’s total loans book is exposed to coal, (ii) 40% of it is classified as non-performing loans (NPL), and (iii) the NPL coverage is 60%.

Annualised ROE dropped 16ppts to 1% but regulatory capital ratios improved 10-30bpts. 1Q15 vs. 4Q14, QoQ

Conversely, quarterly earnings jumped 80% due to lower bad loan provisioning (-26%). Otherwise it would have been dragged by lower income (-8%) and higher opex (+10%).

NIM fell 34bpts given the shift towards higher quality credit.

LDR contracted 4ppts to 97% as loans growth was flat while deposits grew 4%.

CIR rose 9ppts (to 54%) due to increasing opex (+10%) and narrower income base (-8%).

Similar to YoY basis, asset quality worsens as GIL spiked up 17bpts to 4% while credit charge remains high at 3% (vs. 4Q14: 5%).

Outlook

Management guided this year’s NIM to contract below 5% and gross NPL ratio to come in between 4-4.5%.

NIM compression can be explained by: (i) last February’s benchmark interest rate cut of 25bpts, (ii) heightened competition for deposits, and (iii) shift towards higher quality credit.

Asset quality issues will continue to linger and gross NPL ratio to stay at elevated levels, since commodity prices remain soft.

Change to Forecasts

No change to our forecasts, pending a meeting visit next week. To note, CIMB Niaga contributed 19% to Group’s PBT in FY14.

Rating

Maintain MARKET PERFORM

Valuation

Our GGM-TP of RM6.21 is unchanged. This is based on 1.28x FY15 P/B; we utilised: (i) COE of 8.8%, (ii) FY15 ROE of 10.5%, and (iii) terminal growth of 3%.

The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Recall that the stock was traded at average P/B of 2.0x for the past two years when it generated ROE of more than 15%. As a result, we employed a lower P/B valuation yardstick.

Risks to Our Call

Steeper margin squeeze.

Slower-than-expected loans and deposits growth.

Worse-than-expected deterioration in asset quality.

Further slowdown in capital market activities.

Adverse currency fluctuations.

Source: Kenanga Research - 23 Apr 2015