CIMB’s 1H16 core net profit improved by 33% and was within our expectations at 52% but below consensus at 45%. No change in our earnings forecast as economy conditions in the ASEAN region remain challenging going forward. TP maintained but downgrade to MARKET PERFORM call.

1H16 core net profit (CNP) of RM1,687m (+38.3% YoY) was within expectations, accounting for 52%/45% of our/consensus estimates brought about by falling opex at 11.5% and declining allowances for impairments at 1.1%. An 8.0 sen DPS was declared (within our expectations of a full-year DPS of 15.3 sen). Loans growth was slower than expected at +6.5% YoY with NIM compression less than 5bps (6M15: -22bps). Deposit taking was higher than loan at +7.2% with domestic deposits growing +7.7% YoY. On a quarterly basis, CNP improved +7.3% QoQ attributed to rebound in top line but dragged by higher provisioning (credit costs up by 18bps) with NIMs falling by 18bps. Both loans and deposits growth were disappointing at +2.1% and -0.3%, respectively.

6M16 vs. 6M15, YoY

• Compared to the previous corresponding period, top line growth moderated at +1.5% (6M15: +8.3%) due to improvement coming from: (i) Net Interest Income (NII) at +6.2% (6M15: +5.1%), (ii) Islamic Banking Income at +11.1% (6M15: +5.1%) but offset by Non-Interest Income (NOII) at -10.8% (6M15: +16.2%). Islamic banking income was supported by strong financing growth of +10.3%.
• Annualised group NIM fell by 5bps to 2.57% as falling lending yield (16bps) outpaced the fall in cost of funds (3bps). However, improved NIMs were seen in both Indonesia (+14bps) and Thailand (+63bps).
• Cost Income Ratio (CIR) was down by 8ppts to 55.4% (above industry’s CIR of 49.7%) as opex fell 11.5% vs. total income growth of +1.5%. Fall in Opex was driven by fall in personnel cost of 20.4%.
• At the PBT level, Malaysia is still the biggest contributor, accounting for 75% (6M15: 77%) followed by an improved Indonesia at 13% (6M15: 4%), Singapore at 6% (6M15: 9%) and Thailand at 4% (6M15: 5%).
• Loans were slower compared to the previous corresponding period at +6.5% (6M15: +16.1%) vs. our estimates of +9% and the industry average of +5.6%. On a geographical basis, loans were driven by domestic demand at +7.7% negated by falling demand from Indonesia (- 1.6%) and Singapore (-4.0%). By type, loans were driven by mortgage financing (+11.8%). There was a marginal change in loans composition with Malaysia at 55% (6M15: 54%), Singapore at 11% (6M15: 12%) and no change in Indonesia (at 19%) and Thailand (8%).
• Mirroring loans, deposits were slower +7.2% (6M15: +9.7%) driven by domestic deposits growing at +7.5% (vs industry average of -0.5%) and Singapore (+19.2%) negated by falling deposits in both Indonesia (-3.6%) and Thailand (-5.7%). Deposits were driven by FDs (+7.3) with CASA growing at 7.6%. Nevertheless, CASA improved marginally by 20bps to 35.4%. With subdued loans growth, LDR fell 70bps to 94.2% (vs. industry’s +87.5%).
• GIL improved by 15bps to 3.16% (vs industry’s 1.66%). Credit charge was flattish at to 0.80%.
• Loan loss coverage (LLC) improved 5ppts to 83.5% (vs. the industry average of 89.5%) but well within the 70% regulatory requirements.
• Capital adequacy remained strong with CET1 and CAR improved 100bps and 160bps to 10.7% and 15.6% (both fully loaded), still above the regulatory requirements of 7% and 10.5%, respectively.
• Annualised ROE was at 8.2%. This is weaker than our forecast of 10.0% and management’s guidance of 10%.

2Q16 vs. 1Q16, QoQ

• CNP rebounded by +7.3% (3M16: -1.4%) due to improvement coming from total Income at +4.8% (3M16: -7.9%) but dragged by higher provisioning at +26.9% (3M16: -19.8%).
• Top line growth improved due to improvement in NOII at +25.9% (3M15: -22.5%) but negated by fall in both NII and Islamic banking at 1.3% and 5.5% respectively (3M16: -3.1 and +4.9% respectively).
• NIMs fell by 18bps to 2.50% attributed to falling yields outpacing COF.
• CIR was 4ppts lower to 53.6% with opex falling by 2.2%.
• Loans improved by +2.9% vs. decline in deposits at 0.3% forcing LDR up by 3ppst to 94.2%. CASA was almost flattish at 35.6%.
• Asset declined with GIL ratio up by 12bps to 3.16% and higher allowances for impairments, which led to higher credit charge by 16bps to 0.80%.

Outlook still challenging. With external economic environment still challenging, management is still cautious in its outlook for the rest of FY16. Management is hopeful on better recovery from Indonesia being a beneficiary of the infrastructure spending and lower interest rates. Performance from both Malaysia and Singapore is likely subdued and in Thailand the focus will be on asset quality. As for overall asset quality, both Malaysia and Indonesia were flat YoY, with Singapore coming off. There were no new R&R seen for 1H16. O&G exposure in only 3% of total gross loans of which only 18% (of the 3% exposure) is impaired. Risk management, asset quality and cost management initiatives are still the core focus areas going forward.

Despite the challenging environment, management is keeping to its FY16 guidance; (i) ROE of c.10%, (ii) 10% loans growth (might be lower to 9% due to the challenging economy), (iii) NIMs to further compress by 5-10bps, and (iv) credit costs of between 60bps to 70bps. We made no changes in our assumptions for FY16E and maintained our FY17E assumptions with: (i) ROE to come in at around 7.7%/8.3% for FY16/FY17, (ii) loans growth of 9% for both FY16/FY17, (iii) deposits growth around 10% for both years, (iv) credit costs of around 69bps/65bps for FY16/FY17, (iv) CIR at around 58%/56%, and NIMs compression by 6bps for FY16 but higher by 1bps to 2.61 for FY17..

Forecasts earnings maintained. With the unchanged assumptions, our forecast earnings for FY16E/FY17E are maintained at 3,261m/RM3,786m.

No change in TP but rating downgrade to MP. Our TP is maintained at RM4.87. This based on a 0.9x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17 ROE of 8.2%, and (iii) terminal growth of 2.5%. At current valuation, we see limited upside, thus downgrade to MARKET PERFORM.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) Worse-thanexpected deterioration in asset quality, (iv) Further slowdown in capital market activities, and (v) Adverse currency fluctuations

Source: Kenanga Research - 30 Aug 2016