Period

2Q15/1H15

Actual vs. Expectations

CIMB Niaga’s 1H15 earnings of IDR176bn (-91% YoY) was below expectations, representing only 5% of both our and consensus’ full-year forecasts.

The shortfall was due to: (i) a sharp decline in noninterest income and (ii) higher provision for bad loans.

Dividends

No dividends were declared.

Key Results Highlights

1H15 vs. 1H14, YoY

The subpar performance was due to: (i) weak noninterest income as treasury and bancassurance fees fell 34%, (ii) higher opex from rising personnel cost and administrative expenses (+10%), coupled with (iii) larger loan loss provision (>3x).

Net interest margin (NIM) was flat at 5%.

Loans grew 10%, a tad slower vs. deposits (+12%). Consequently, loan-to-deposit ratio (LDR) declined 2ppts to 97%.

Current account & savings account (CASA) grew a commendable 17%, which now makes up 47% of total deposit base.

Cost-to-income ratio (CIR) spiked 4ppts to 55% as opex rose 9% while total income ticked up only a mere 2%.

Asset quality deteriorated as: (i) gross impaired loans (GIL) ratio rose 1ppts to 4.3% and (ii) credit charge ratio increased 3ppts to 3%.

Annualised ROE dropped 14ppts to 1% but regulatory capital ratios were relatively unchanged. 2Q15 vs. 1Q15, QoQ

In contrast, quarter earnings surged 12% on the back of lower bad loan provisioning (-8%). That said, results could have been better if not for the fall in total income (-2%).

NIM fell 21bpts given: (i) higher cost of funds, and (ii) the shift towards higher quality credit.

LDR was flat at 97% as loans and deposits grew in tandem (+3%).

CIR increased 2ppts to 56% due to smaller income base (-2%).

Asset quality did not show any improvement: (i) GIL ratio inched up 22bpts to 4.3% while (ii) credit charge remained high at 3% (vs. 1Q15: 3.4%).

Outlook

Meaningful earnings recovery could be capped by slower economic growth in Indonesia.

Management reiterated its earlier guidance: (i) NIM to contract below 5%, and (ii) 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, causing gross NPL ratio to stay at elevated levels, since commodity prices remained soft.

Change to Forecasts

Following Niaga’s weak set of results, we toned down CIMB Group’s FY15/FY16 earnings by 5%/3% to RM3,591m/RM4,192m, after factoring in higher loan loss provision and lower non-interest income.

Rating

Upgrade to OUTPERFORM (from MARKET PERFORM)

Although operational headwinds still persist over the next 2-3 quarters, we believe 2016 will likely pan out to be a better year for CIMB after it embraced a series of cost-cutting measures. Hence, value has started to emerge given the recent pullback in its share price. Furthermore, we believe that most negatives could have already been priced in. To note, as of end June-15, CIMB’s foreign shareholding was at an all-time low of 29.4% and it is currently trading at 1.1x P/B (previous low in 2009 was 31.6% and priced at 1.2x P/B).

Valuation

In tandem with the cut in earnings, we lowered our GGM-TP to RM5.96 (previously RM6.31). This is based on 1.16x FY16 P/B; we utilised: (i) COE of 8.8% (unchanged), (ii) FY16 ROE of 9.8% (previously FY16 ROE of 10.0%), and terminal growth of 3% (unchanged).

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 - 3 Aug 2015