Period

2Q15/1H15

Actual vs. Expectations

CIMB’s 1H15 PAT of RM1,219.9m (-39.5% YoY) was below our and consensus’ expectations, making up only 32% of both our and consensus’ full-year forecasts. The abysmal performance was due to higher operating expenses and loan loss provisions.

Dividends

An interim net dividend of 3.0 sen per share was declared, lower than 2Q14 net dividend of 10.0 sen per share.

Key Results Highlights

1H15 vs. 1H14, YoY

The abysmal bottom line growth of -39.5% (1H14: - 3.4%) was dragged by: (i) increase in overheads at +18.9% (1H14: +-5.7%) mainly arising from the increase in personnel expenses of 25.6% (1H14: - 6.3%) brought about mostly by inflationary effects in Indonesia, and (ii) an elevated loan loss provisions of 311% to RM1.06b (1H14: 70.4%). This translated to a credit charge of +55bps (vs. our assumptions of 62 bps & 1H14's level of 20bps).

At the income level, performances were better with a +8.3% growth (1H14: +0.94%) driven by strong growth from the net interest income (NII), non interest income (NOII) and Islamic Banking at +5.1%, +16.2% and +5.1% (1H14: 9.6%, -12.1% and -4.5%), respectively. The excellent performance of the NOII segment was attributed to stellar performance from investment & trading activities, which grew by 52%.

However, NIM decreased by 24bpts to 2.64% dragged by higher consumer deposit costs in Malaysia. (vs. our assumption of 2.70%).

Due to the increase in overheads, cost-to-income ratio (CIR) nudged by 6ppts, to 63.6% (vs. our assumption of 57.3%).

Loans and deposits grew healthily at 16.1% and 9.7%, respectively, bringing its loan-to-deposit ratio (LDR) to 95% from 90%. On an annualised basis, this translated into a loans growth of 11.3%. This is higher than management's target of 10% for loans growth (vs. our assumptions of 10%).

Strong loans growths were seen in Malaysia (+10.4%), Singapore (+15.0%) and Thailand +10.1%. Indonesia was at 9.8%. Foreign loans constituted 43.3% of the loan portfolio (1H14: 40.6%).

Loans growth was primarily driven by Domestic Business Enterprises at +14.9% (1H14:-1.9%) and foreign entities at +42.6% (1H14: 48.2%). The Domestic Business Enterprises constituted 33.9% (1H14: +34.2%) of the loan portfolio with individual loans making the bulk of it at 47.66% (1H14: +48.8%).

Deposits growth came mainly from term/investment deposits, which grew by 14.1% (1H14: -2.2%). CASA surged by 12.0% (1H14: +5.6%) and now represents 35.4% of total deposit base (+70bpts). Strong deposits growth was seen in Indonesia, Thailand and Singapore at 12.2%, 11.4% and 15.4% respectively. Malaysia only registered 4.1%.

Asset quality deteriorated for the period under review with gross impaired loans rising by 19bps to 3.31% (vs. our assumptions of 3.2%) and annualised credit charge increased by 58 bps to 0.8% (vs. our assumption of 40bps to 0.62%). Loan loss coverage was down by 1ppts to 78%.

Annualised ROE narrowed to 6.4% (-5.8ppts), coming in below management’s full-year target of more than 11.0% vs. our assumption of 10.0%.

CET1, Tier 1 and total capital ratios remained healthy at 9.9%, 10.9% and 13.8%, respectively. Previously, it was at 9.8%, 11.0% and 14.3%, respectively. 2Q15 vs.14Q15, QoQ

Quarterly earnings surged by 10.3% driven by NII, NOII and Islamic Banking income at 3.5%, 3.8% and 8.7% respectively.

NIM decreased by 4bps % with CIR down by 270bps from the previous quarter.

LDR was up by 370bps to 94%.

Asset quality degenerated with gross impaired loans up by 13bps and credit charge improved by dropping 3bps.

Outlook

Despite the challenging environment, management is confident of improving conditions. It believes that Thailand will have a better 2H while Indonesia has seen the peak of loans provisions. For Malaysia, a stress test conducted showed that the Group is comfortable with its liquidity positions. It sees strong loan growth with opportunities aplenty in Indonesia.

Management kept its FY15 guidance: (i) ROE to come in at 11% (Kenanga: 9.2% from 10.0%), (ii) Total loans growth of 10% (Kenanga: 9.0% from 10.0%), (iii) Credit charge ratio of 40-50bpts (Kenanga: 59bpts from 58bpts), and (iii) CIR below 55% (Kenanga: unchanged at 57%).

Change to Forecasts

Given the lacklustre 2Q15 results, we toned down our FY15E core profit slightly by 5% to RM3,595m from RM3,792m and our FY16E core earnings by another 7% to RM4,032m.

Essentially, we only increased our FY15E credit charge assumption to 59bpts from 58bpts.

For the next two years, FY15E-FY16E ROEs are expected to come in at 9.2%-9.4%.

Rating

Reduced to MARKET PERFORM

Valuation

With the cut in earnings, we arrive at a new GGM-TP of RM5.63 (previously RM6.31). This is based on 1.1x FY16 P/B (previously 1.22 FY16 P/B); we utilised: (i) COE of 8.8% (unchanged), (ii) FY16 ROE of 9.42% (previously FY16 ROE of 10.0%), and (iii) terminal growth of 3% (unchanged).

The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Further slowdown in capital market activities.

Unfavourable regulatory changes.

Adverse currency fluctuations.

Source: Kenanga Research - 1 Sep 2015