CIMB Niaga (Niaga)’s 9M16 core earnings of IDR1,289b was above expectations, accounting for 84% of ours and consensus’, mainly attributed to lower provisioning and lower operating losses. No dividends were announced as expected. Earnings forecasts for the Group are unchanged as we expect Niaga’s contribution to the Group’s PBT will still be < 10% (FY15: 4%). TP of RM5.27 and MARKET PERFORM call maintained.

Niaga’s 9M16 net profit was stellar jumping 389% to IDR1,289b mainly attributed to lower loan loss provisions and operating losses with lower opex. Income was slower YoY despite improvement in NIMs as loans saw declining growth YoY. Improvement in NIMs was attributed to lower downward pressure in lending yields coupled with lower cost of funds. Asset quality deteriorated further but credit costs improved due to lower provisioning. On a quarterly basis, the story was much the same with earnings up by 24% due to lower loans provisions and lower operating losses. Loans continued to be under pressure as it declined by 1% QoQ. NIMs continued to improve along with credit costs with asset quality stable QoQ.

9M16 vs. 9M15, YoY

• The excellent 9M16 results were primarily due to: (i) decline in allowances for impairments by 12% to IDR3,500b, (ii) lower operating losses at IDR850b (-37% YoY), and (iii) declining opex at +5% (1H15: +13.0%) despite total income increment was only at 3% (9M15: +9%). Operating losses were lower due to markto-market losses on financial assets (9M15: IDR500b losses).
• Total income slower improvement of 3% was driven by a much slower net interest income of 4% (9M15: 9%) but Non-interest Income decline marginally by 0.4% (9M15: +7.2%) due to lower realised gain on spot & derivatives of IDR270m (9M15: IDR1.03b).
• Despite the massive cut in interest rates (by 150bps) throughout 2016, net interest margin (NIM) improved by 30bps to 5.15% as lending rates was resolute falling by only 27bps while costs of funds fell by 50bps. The lower compression on lending yields can also be attributed to slower demand for loans with improved CASA contributing to the elevated NIMs.
• Loans declined by 3% (9M15: +7%) vs. industry growth of 5%, as management focused on conservative growth and asset quality while deposits fell by 9% (9M15: +11%) vs. industry growth of +3.3%. As such, loan-to-deposit ratio (LDR) increased by 6ppts to 102%. The fall in loans was dragged by commercial banking which fell by 9.5% whilst corporate banking improved 2.2%.
• Current account & savings account (CASA) deposits were up by 5ppts to 52%.
• Cost-to-income ratio (CIR) fell by 4ppts to 46% as total income growth outpaced opex growth (+3% vs. -5%).
• Assets quality which improved was mixed as: (i) gross impaired loans (GIL) ratio rose by 73bps to 3.9% but (ii) credit charge ratio fell by 30bps to 2.6%. Loan loss coverage fell by 6ppts to 114%.
• Regulatory ratios improved further as Tier 1 Ratio increased by 270bps to 16.6% as do Total Capital which rose by 210bps to 18.0%, well above the regulatory ratios of 8.5% and 10.5%, respectively.
• With earnings improved, annualised ROE was up to 5.4% from 1.2% the year before.

Source: Kenanga Research - 31 Oct 2016