1Q16 core earnings of IDR269b was below expectations, accounting for 13% of our and consensus estimates. No dividends announced as expected. Earnings for the Group are unchanged with TP of RM4.46 and our UNDERPERFORM call is maintained.

CIMB Niaga 1Q16 net profit was below expectations but registered a 224% jump in net profit growth attributed to stellar performance from Non-Interest Income (NOII) and lower provisioning.

3M16 vs. 3M15, YoY

• The improved 1Q16 results were due to: (i) higher total income at +13% (vs. 1Q15: +3.5%), (ii) decline in allowances for impairments by 16% to IDR1.2b (1Q15: IDR1.4b), but mitigated by (iii) higher tax rate of 31% (1Q15: 23%).
• Net Interest Income (NII) and Non-Interest Income (NOII) increased by 1.4% and 66%, respectively, (1Q15: +11% and +29%, respectively). NOII was boosted by improved forex and capital market operations.
• Net interest margin (NIM) compressed by another 17bps to 5.0% as fall in average lending yields outpaced the decline in cost of funds by 19bps.
• Loans decline by 3% (1Q15: +10%) due to a management focus on conservative growth while deposits fell by 5% (1Q15: +12%). As such, loan-to-deposit ratio (LDR) increased by 2ppts to 99%.
• Current account & savings account (CASA) deposits were up by 9ppts to 52%.
• Cost-to-income ratio (CIR) fell by 3ppts to 51% as total income growth outpaced opex growth (+13 vs. +6%).
• Assets quality improved as: (i) gross impaired loans (GIL) ratio fell by 17bps to 3.9% and (ii) credit charge ratio fell by 64bps to 2.7%. Loan loss coverage improved by 14ppts to 116%.
• Annualised ROE jumped 2.4ppts to 3.6% and regulatory ratios improved by 150-170bps to 16% (for Tier 1) and 18% (for Total Capital) well above the regulatory ratios of 8.5% and 10.5%, respectively.

1Q16 vs. 4Q15, QoQ

• On a quarterly basis, earnings improved by 65% due to: (i) decline in opex (-17%), (ii) decline in provisions (-14%) but mitigated by a higher tax rate of 31%.
• NIM was flattish at 5% and so was LDR at 99% as fall in loans and deposits growth was similar at -3.6% and -3.2%, respectively.
• CIR fell by 9ppts to 51% as fall in opex (-17%) outpaced fall in total income (-2%).
• Asset quality deteriorated for the quarter as GIL ratio went up by 16bps to 3.9%.

Outlook.

Niaga's performance is likely to improve further in FY16, being a beneficiary of the infrastructure spending announced, stronger rupiah against the dollar, lower inflation and interest rate cut by 75bps since early this year. However, asset quality issues should continue to linger (gross NPL ratio to stay at elevated levels), since commodity prices remain challenging. Management still maintains its guidance of: (i) loan growth of around 7-8%, and (ii) NIMs trending below 5%. Management added that loan provision remains elevated while no new corporates in the NPL books and provisions are mainly top-ups in the existing accounts, mainly from its commodities portfolio.

Source: Kenanga Research - 3 May 2016