CIMB Niaga (Niaga)’s 12M16 core earnings of IDR2,082b was above expectations, accounting for 125% 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 OUTPERFORM call maintained.

Ending with a bang due to operational efficiency. Niaga’s 12M16 net profit was stellar, jumping 386% to IDR2,081.7.7b mainly attributed to lower loan loss provisions and lower operating losses. Improvement in top-line was satisfactory at +5.1% YoY driven by improvement in both Net Interest Income (NII) (+6.2% YoY) albeit a slower and Non-Interest Income (NOII) at 2.1% YoY. Better NII was attributed to better loan pricing with improvement in NIMs by 48bps to 5.4% despite the significant rates cut in 2016. On a yearly basis, loans and deposits growth were mixed with the former at +1.5% YoY and the latter at -4.8% YoY (FY15: +0.6% YoY and +2.2% YoY, respectively). Loans were driven by corporate banking (contributing 34% and growing +7% YoY) With loans outpacing deposits, loan-todeposit ratio (LDR) jumped 670bps to 106%. CASA to total deposits improved 410bps to 50.9% and coupled with lower Cost of Funds (CoF) by 62bps saw the widening NIMs. Opex decline by 3% and as income outpaced expenses, Cost to Income ratio (CIR) improved by 390bps to 49%. Asset quality was mixed with Gross Impaired Loans Ratio (GIL) deteriorating slightly by 15bps, but credit costs improved by 396bps to 2.6%. With improvement in earnings, ROE was 5ppts higher at 6.3%.

No change in cautious outlook. Although management guided for a high single-digit loan growth ahead, we are cautious on such outlook given the slow economic outlook ahead with the Indonesian GDP expected to be flattish or only slightly better. Despite the improved NIMs in FY16, management guided for ~5% in NIMs for 2017 given that competitive loan pricing is expected with fewer loans in the pipeline. Although asset quality is expected to prevail as management continues managing down its exposures from sensitive portfolios (such as auto), higher inflation abetted by spike in interest rates (due to rise in US interest rates) could still lead to a spike in NPLs upwards.

No change in forecasts. Earnings forecasts for CIMB group are left unchanged as Niaga’s contribution to overall Group’s PBT is immaterial. Note that CIMB Niaga contributed 8% of the group’s PBT in FY15 and is expected to account for less than 10% of FY16 PBT.

Valuation & recommendation for the Group maintained. For now, pending the Group’s 4Q16 results announcement, which is expected to be released next week, we keep our GGM-TP of RM5.27. Our TP is based on a 1.0x FY17E P/B where we utilised: (i) COE of 8.8% (unchanged), (ii) FY17 ROE of 8.7% (8.2% previously), and (iii) terminal growth of 2.5% (unchanged). OUTPERFORM call is maintained. Risks to our call are: (i) lower-than-expected margin squeeze, (ii) higher-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 - 21 Feb 2017