CIMB Thai’s 1H16 performance was below expectations although core earnings grew by 5% YoY to THB367m brought about by dismal performance in the 2Q. No dividends announced as expected. As the bank contributed less than 3% of the Group earnings, we made no revision to our overall forecast with TP of RM4.87 and maintain our OUTPERFORM call.

CIMB Thai’s 1H16 net profit was below expectations accounting for 30% of streets’ estimate but it registered a 5% YoY jump. A weak 2Q (-88% QoQ) dragged its overall performance. 1H16 growth was attributed to decent performance from Net Interest Income and higher operating gains. Net Interest margin also improved but credit cost continued to spike up.

1H16 vs. 1H15, YoY

• Bottom-line growth of +5.5% (6M15: -44%) was driven by decent performances from total income (+6%) and higher operating gains at 30%.
• Total income was lifted by: (i) growth in net interest income (+23%) but capped by the decline in non-interest income (-27%) dragged by losses in financial liabilities of THB1.95b (vs. gains of THB142m in 1H15).
• Cost-to-income ratio (CIR) fell 3ppts to 55% on better cost management and increased income (+6%), as opex rose marginally by 0.2%.
• Net interest margin (NIM) improved by 63bps to 3.8% on the back of more efficient fund management funding.
• Net loans grew by 3% (1H15: +9%) and deposit growth fell by 6% (1H15: +11% which led loan-to-deposit ratio (LDR) expanding by 9ppts to 117%.
• Asset quality deteriorated by 40bps as gross impaired loan (GIL) ratio advanced to 4.3% mainly due to slower repayment from corporate and SME accounts attributed to the slow economy. Credit cost stays elevated by 30bps to 2.5% and Loan loss coverage ratio fell by 1ppts to 93%.
• Annualised ROE fell by 30bps to 3% attributed to slower net profit (+5%) vs. shareholders’ equity expansion of +19%.
• Tier 1 capital ratio was up 160bps to 11% while total capital ratio improved by 110bps to 15% (well above Basel III requirements of 8.5% and 10.5%, respectively).

2Q16 vs. 1Q16, QoQ

• On a quarterly basis, quarterly earnings fell 88% on the back of: (i) falling NOII (-30%), and (ii) higher allowances for impairments (+20%) despite higher NII (+4%) and operating gains (+27%).
• NIM increased by 10bps (to 3.8%) while CIR rose by 2ppts to 56%.
• LDR fell 6ppts to 117% as deposits accelerated by 6% while loans improved marginally by 0.5%.
• Asset quality depressed further as GIL ratio advanced by 130bps to 4.3% while credit cost surged by another 40bps to 2.7%.

Not much to look forward to. 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 upward pressure on its loan provisioning and NPL ratio. However, we see profitability holding up with its cost rationalizations (branches have been reduced by 38%) and NIM holding up. The banking industry has toned down deposit mobilisation to ease their worries over NIM, while the excess liquidity in the banking system is supporting the banks' desire to refrain from chasing deposits.

Source: Kenanga Research - 22 Jul 2016