Period

3Q15/9M15

Actual vs. Expectations

CIMB’s 9M15 PAT of RM2,023.8m (-30.4% YoY) was below our/consensus’ expectations, accounting for only 61%/60% of the full-year forecasts. The abysmal performance was due to further loan loss provisions.

Dividends

No dividend was declared as expected.

Key Results Highlights

9M15 vs. 9M14, YoY

PAT was dragged by higher loan loss provisions of RM1,589.4m (+163.6%).

Total income improved by 8.6% (9M14: +1.0%) as: (i) Net interest income (NII) rose by 7.2%, (ii) Islamic banking income advanced 6.3%, and (iii) Net interest income (NOII) jumped 12.4%.

Operating profit declined by 28.3% as expenses surged by 16.3% leading to Cost-Income Ratio (CIR) advancing 4ppts to 62.0% (vs industry’s CIR of 51.2%).

At the PBT level, Malaysia is still the biggest contributor, accounting for 75% (9M14: 68%) followed by Indonesia at 8% (9M14: 22%) and Thailand at 6% (9M14: 5%).

NIM fell by 48bpts to 2.33% as competition for deposits intensified (vs. our assumptions of 2.54bpts).

Loans and deposits grew by 10.7% and 10.0%, respectively, after excluding forex fluctuations (including the forex fluctuations, growth were at 19.3% and 17.9%, respectively). We had forecasted a loan/deposit growth of 9% each.

Malaysia is still the biggest contributor in loans at 54.8% (9M14: 58.8%). Loan was driven by growth from Indonesia (+12.3%), Malaysia (+10.5%), Thailand (+9.2%).

Deposits growth was driven by Singapore (+17.6%), Indonesia (+11.3%), and Malaysia (+10.8%).

As loans outpaced deposits, LDR was at 95.8% from 94.7% previously. CASA fell by 1ppts to 34.4%.

Asset continued to deteriorate as GIL ratio advanced 14bpst to 3.42%. The bulk of the impaired loans were from working capital at 35.0% (9M14: 31.3%); housing at 16.3% (9M14: 19.3%) and construction at 13.6% (9M14:14.6%).

Loan loss coverage nudged up by 2.4ppts to 76.6% but still below the industry coverage of 98%.

Credit cost was up by 58bpts to 0.80% (we had assumed it to be at 70bpts).

CET1 and CAR fell by 60bpts and 140bpts to 9.8% and 12.5%, respectively due to increase in its Risk Weighted Assets (RWA) but still above the regulatory requirements of 7% and 10.5%, respectively.

ROE was at 8.3% (vs. our forecast of 8.5% and management’s target of 11%).

Key Results Highlights

(Con’t) 3Q15 vs.2Q15, QoQ

On a quarter to quarter basis, PAT surged by 25.6% on the back of: (i) improvement in operating profit by 21.8%, (ii) increase in contribution by associates by 11.5%, and( iii) lower tax rate by 23.9% (2Q15: 26.2%).

Operating profit surged by 21.8% despite total income being flat at +0.1% as operating expenses and allowances for impairment declined by 7.4% and 0.5%, respectively. The marginal rise in operating profit was attributed to decline in Islamic banking income and NOII at 3.2% and 11.2%, respectively, as NII rose by 6.5%.

NIMs fell by 67bpts to 1.98%

As opex declined more than total income growth, CIR fell 4.8ppts to 58.9%.

Loans and deposits continued to grow, at 6.5% and 5.4%, respectively, with CASA growing at 2.5%.

LDR jumped by another 90bpts as loans growth outpaced deposit growth.

Asset quality continued to deteriorate as GIL jumped by 110bpts to 3.42% but credit costs improved to 76bpts as loan loss provision lessened.

Outlook

With the uncertain and challenging environment, management is cautious going forward. It expects loan loss provisions to remain elevated, NIMs compressed further and capital markets weak.

Management gave a few guidance for FY15: (i) ROE to come in at around 8.5% to 9.0% (Kenanga: 7.7% from 8.5%), (ii) Total loans growth of 10% (Kenanga: 10% from 9.0%), (iii) Credit charge ratio of 40-50bpts (Kenanga: 75bpts from 70bpts); and (iii) CIR below 55% (Kenanga: unchanged at 58%).

As for FY16, we projects (i) ROE to register at a weaker rate of 7.7%, (ii) loans growth of 10% (at the same time deposit growth is expected at 10%), (iii) credit charge to improve slightly at 0.73% and CIR to remain sticky at 58%.

Change to Forecasts

All told, considering the above mentioned assumptions and given this recent set of lacklustre 3Q15 results, we have toned down our FY15E core profit slightly by 10% to RM3,010m from RM3,341m and reduced our FY16E core earnings by another 2.8% to RM3237m.

Rating

Maintained UNDER PERFORM

Valuation

With the cut in earnings, we arrive at a new GGM-TP of RM4.06 (previously RM4.23). This is based on 0.81x FY16E P/B (previously 1.0 FY16 P/B); we utilised: (i) COE of 8.9% (from 8.8% previously), (ii) FY16 ROE of 7.8% (previously FY16E ROE of 7.9%), and (iii) terminal growth of 3% (unchanged).

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

Risks

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 - 26 Nov 2015