CIMB Thai’s 12M16 performance was below expectations with core earnings falling into negative territory, brought about by high provisioning and dismal performance in the 4th quarter. As the bank contributed less than 4% to the Group earnings, we made no revision to our overall forecast for the Group with TP of RM5.27 and OUTPERFORM call maintained.

12M16 hit by provisioning. CIMB Thai’s 12M16 net loss of THB630m (-151% YoY) was below consensus expectations of a THB1.2b net profit. The sharp loss was attributed to higher provisioning of THB6.3b (+67% YoY). Pre-provisioning Operating Profit (PPOP) was satisfactory at 9% YoY with top line growing at 6% YoY driven by fund-based income of 16% YoY mitigated by falling fee based income of 20% YoY. Lower contribution from trading & forex transaction (- 23% YoY) and higher losses from financial instruments (+76% YoY) dragged the overall performance fee based income. The strong growth in NII was supported by improved NIMs by 50bps to 3.8% due to efficient funding cost management as net loans surged by only 2% YoY. Strong deposit growth of 8% pushed Loan deposit ratio (LDR) lower by 6ppts to 107%. Cost to Income ratio (CIR) fell 1ppts to 59% as opex (+4% YoY) was outpaced by top line growth of 6%. As impairment allowances surged, credit costs surged 110bps to 3.0%. Corresponding to the higher provisioning, Gross impaired loans (GIL) ratio surged 3ppts to 6.1%, attributed to mostly slower repayment ability from corporate borrowers. Loan loss coverage ratio fell by 39 ppts due to the surge in NPL. Capital ratios were mixed as Tier-1 capital fell by 30 bps to 10.7% but Total capital improved 40bps to 16.1%.

Outlook. We view that CIMB Thai will be able to turn positive for FY17, given that loan loss provisioning is expected to peak by then. Profitability will be supported by writebacks as corporate cashflows improved due to the expected stable economy. We are cautious on its target of 5-10% loans growth (vs. FY16: 3.7%) given that Thailand GDP growth is expected to be flat for 2017. We believe a mid-single- digit growth to be achievable on the back of stable and low interest rates (+1.5%), low inflation with government spending and tourism expected to support the sluggish economy in 2017. Profitability will be driven by stable NIMs as the banking industry 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 & risks. No change to our forecasts for the Group as CIMB Thai contributes only ~4% to CIMB Group’s PBT. Key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans and deposits growth, (iii) higher-than-expected rise in credit charge, (iv) further slowdown in capital market activities, and (vi) adverse currency fluctuations.

Valuation & recommendation maintained. For now, pending the Group 12M16 results expected at the end of next month, we keep our GGM-TP of RM5.27. This is based on a 1.0x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17E ROE of 8.7%, and (iii) terminal growth of 2.5%. Maintain OUTPERFORM.

Source: Kenanga Research - 23 Jan 2017