CIMB Thai’s 9M16 performance was within expectations with core earnings falling by 6% YoY to THB798m. The strong earnings performance in 3Q16 (+980% QoQ) has neutralised the high provisioning and dismal performance in 2Q16. No dividends announced as expected. As the bank contributed less than 3% to the Group earnings, we made no revision to our overall forecast with TP of RM4.87 and maintain our MARKET PERFORM call.

CIMB Thai’s 9M16 net profit was within expectation accounting for 72% of streets’ estimate despite registered a 6% YoY decline in net profit. The weaker bottom line was mitigated by meagre improvement in income at 4% as provisions went double-digit at 17%. 9M16 also saw improvement in NIMs and but asset quality was mixed with stable impaired loans but credit costs trended higher. On a QoQ basis, earnings improved by 980% as the quarter saw lower provisioning although income improved marginally at 1%. NIMs deteriorated despite trending higher in the last five quarters. Asset quality was stable QoQ with the lower provisioning which saw credit costs falling.

9M16 vs. 9M15, YoY

• 
  Net profit decreased by 5.7% (9M15: -6.0%) dragged by a 16.7% (9M15: +105.4%) increase in provisions despite a decent performance from total income of +4.1% (9M15: +20.0%).
• 
  Total income was boosted by net interest income (NII) growth of +19.1% but dragged by decline in non-interest income (NOII) of 27.8% (9M15: +6.5% in NII and +63.9% in NOII).
• 
  Cost-to-income ratio (CIR) improved as it fell 2ppts to 56.2% on better cost management and increased income as opex was flat.
• 
  Net interest margin (NIM) improved by 51bps to 3.7% on the back of more efficient funding cost management.
• 
  Net loans growth was slower at 2.6% (9M15: +8.4%) but deposit growth improved at 5.6% (9M15: +3.2% which led to loan-todeposit ratio (LDR) falling by 3ppts to 109.2%.
• Asset quality was mixed as Gross impaired loan (GIL) ratio was flat at 4.3% but Credit cost stayed elevated by 40bps to 3.3% and Loan loss coverage ratio was flat at 89.2%.
• Annualised ROE fell by 100bps to 3% attributed to falling net profit (-5.7%) vs. shareholders’ equity expansion of +18.5%.
• Both Tier 1 capital ratio and total capital was flat at 9.1% and 13.7% but still above the Basel III requirements of 8.5% and 10.5%, respectively.

3Q16 vs. 2Q16, QoQ

• 
  On a quarterly basis, quarterly earnings performance was stellar with a quarterly growth rate of 980.8% to THB431.1m on the back of: (i) marginal improvement in total income of 0.9%, (ii) falling allowances for impairments (-39.0%), and (iii) lower tax rate of at 20.1% (27.8% in 2Q16).
• NIM was lower by 10bps (to 3.7%) while CIR rose by 2ppts to 58.5%.
• LDR fell 7ppts to 109.2% as deposits accelerated by 8.7% while loans improved slowly by +1.6%.
• Asset quality was stable as GIL was flat at 4.3% while credit cost fell by 110bps to 1.6%.

Not much to look forward to. As expected, the weak export-dependent Thai economy is constricting loans growth to the lower single-digit despite the BOT maintaining its interest rates at 1.5%. 2016 is expected to be subdued with upward pressure on 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' objective to refrain from chasing deposits.

Forecasts Unchanged. No change to our forecasts for the Group as CIMB Thai contributes only ~4% to CIMB Group’s PBT.

Valuation & recommendation maintained. For now, pending the Group 3Q16 results expected at the end of next month, we keep our GGM-TP of RM4.87. This is based on a 0.9x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17E ROE of 8.2%, and (iii) terminal growth of 2.5%. Maintain MARKET PERFORM.

Key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans & deposits growth, (iii) higher-than-expected rise in credit charge, (iv) further slowdown in capital market activities, and (vi) adverse currency fluctuations.

Source: Kenanga Research - 18 Oct 2016