Period

1Q16

Actual vs. Expectations

CIMB Thai’s 1Q16 earnings of THB327m (+150% YoY) were in line, representing 25% of consensus full-year forecast, driven by higher net interest income (NII).

Dividends

No dividends were declared.

Key Results Highlights

1Q16 vs. 1Q15, YoY

Bottom-line (+150%) was driven by strong performances from: (i) total income at +12% and (ii) higher operating gains at 15%.

Total income was lifted by: (i) growth in net interest income (+25%) but capped by a decline in non-interest income (-14%) that dragged by fall in losses in financial liabilities (-182%) as well as (ii) gains in trading and forex transactions (+195%).

Cost-to-income ratio (CIR) fell 7ppts to 54% on the result of better cost management and increased income (+12%), as opex fell by 2%.

Net interest margin (NIM) improved by 55bps to 3.7% on the back of more efficient fund management funding.

Net loans grew by 5% but deposit growth fell by 15%. In turn, loan-to-deposit ratio (LDR) expanded by 23ppts to 123%.

Asset quality improved by 70bps as gross impaired loan (GIL) ratio drop to 3.0% mainly due to stringent credit risk assessments, effective risk management policies, improvement in loan collection process and better management.

Loan loss coverage ratio improved by 21ppts to 115% due to a more conservative reserve policy.

Annualised ROE improved by 3ppt to 5.2% attributed to higher net profit (+150%) vs. shareholders’ equity expansion of +21%.

Tier 1 capital ratio was up 110bps to 11% while total capital ratio improved by 50bps to 15% (well above Basel III requirements of 8.5% and 10.5% respectively).

1Q16 vs. 4Q15, QoQ

On a quarterly basis, quarterly earnings rose 59% on the back of: (i) stellar NII growth (+17%), (ii) declining operating expenses (-3%), and (iii) lower tax rate of 20% (vs 4Q15: 24%)

NIM increased by 10bps (to 3.7%) while CIR fell 11ppts (to 54%).

LDR spiked by 10ppts to 123% as deposits contracted by 8% while loans improved marginally by 0.5%.

Asset quality improved as GIL ratio fell by 10bps to 3.0%.

Outlook

The Thai economy is expected to be subdued for 2016 as weak exports and slow domestic consumption continue to drag the economy. The Bank of Thailand kept interest rates steady at 1.5% since April 2015 to encourage spending and promote growth.

The subdued economy for 2016 is expected to put further upward pressure on its loan provisioning and NPL ratio. NIM compression is likely to prevail as competition increased for deposits. Lending rates are facing downward pressure as with the easing of monetary policy to stimulate growth. Several banks in Thailand have cut their minimum lending rate.

Change to Forecasts

No change to our forecasts for the Group as CIMB Thai contributes only ~3% to CIMB Group’s PBT.

Rating

Maintain UNDERPERFORM

Valuation

For now, we keep our GGM-TP for the CIMB Group of RM4.46. This is based on 0.89x FY16E P/B (previously 0.81x); we utilised: (i) COE of 8.3% (from 8.0% previously), (ii) FY16E ROE of 7.7% (unchanged), and (iii) terminal growth of 3% (unchanged).

Risks

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 - 22 Apr 2016