CIMB’s 12M16 core net profit improved by 2% YoY and was within our, but below consensus, estimates, at 105% and 94%, respectively. Our FY17E earnings are tweaked slightly upwards based on management’s guidance. TP slightly higher but downgrade to MARKET PERFORM.

Broadly slower YoY. 12M16 core net profit (CNP) of RM3,414.4m improved by 19.8% YoY, within our expectations (accounting for 105% of our estimates but below consensus at 94%), brought about by falling opex (-6.5% YoY). Top-line improvement (+3.4% YoY) was slower than FY15 (+9.6% YoY) with both Net Interest Income (NII) and Islamic Banking income improving by +5.2% and +8.6%, respectively, but dragged by Non-Interest Income at 2.3% YoY. NIMs compression was small at 2bps (vs. 5-10bps management’s guidance and our estimates of 6bps). The lower compression was due to improved NIMs QoQ (17bps due to improvements from Indonesia). Cost to Income ratio (CIR) improved by 6ppts to 54.4% (vs. industry average of 48.9%) as opex deceleration was faster than revenue. No change at the PBT level, with Malaysia still the biggest contributor, accounting for 78% (12M15: 79%) followed by an improved Indonesia at 17% (12M15: 8%), with Singapore and Thailand contributions falling at 5% and 0%, respectively (12M15: 8% and 3%, respectively). DPS of 12 sen declared for the quarter making FY16 dividend at 20 sen/share (above our 14 sen/share/).

Loans (in line) grew at +8.7% YoY (vs. industry’s +5.3% YoY) brought about by a surge in Q4 at +6.3% QoQ. Loans were driven by the mortgage (11.1% YoY) and Working Capital (+9.7% YoY). On a geographical basis, loans were driven by domestic demand at +10.5% YoY with Indonesia, Thailand and Singapore growing at +1.6% YoY, +2.1% YoY and +4.9% YoY respectively (all in local currency growth). Malaysia is still the biggest contributor of loans at 56%, followed by Indonesia (20%) and Singapore (10%). Deposits were stronger at 5.9% YoY (vs. industry’s +1.5% YoY) with CASA improving by 10.4% prompting higher CASA ratio by 140bps to 35.8%. Deposits were driven by domestic deposits growing at +8.5%, Indonesia (+1.1% YoY), and Thailand (+7.9% YoY) but Singapore fell by 4.9% YoY. As loans outpaced deposits, loan-to-deposit ratio (LDR) surge by 250bbps to 96.3%. Asset quality deteriorated for the year by 24bps to 3.29% (vs. industry’s 1.64%) prompting higher impairment allowances, which led to credit charge rising by 3bps to 0.79%. Capital remains adequate with CET1 and CAR at 11.9% and 16.8% well above the regulatory requirements of 7.0% and 10.5%, respectively. ROE up by 70bps to 7.9% (lower than management’s guidance of 9% but in line with our estimate at 7.7%).

We are still cautious. Despite an improvement in its YoY performance, we are still cautious on the prospects of CIMB going forward given the volatile and slow environment and we believe management’s targets for FY17 can be achieved via efficiency in operational and further joint ventures. We tweaked slightly our assumptions based on management’s guidance.

FY17 forecasts earnings revised. Based on management’s guidance, our forecast earnings for FY17E were upped by 2% to RM4,072m. TP is revised up but rating downgraded. Our GGM-TP is slightly up to RM5.29 (from RM5.27) based on a 1.0x FY17E P/B (unchanged) where we utilised: (i) COE of 8.8%, (ii) FY17 ROE of 8.6%, and (iii) terminal growth of 2.5%. Lacking concrete fundamental growth with potentials earnings upsurge likely on partnership or operational efficiency, we downgrade CIMB to MARKET PERFORM.

Source: Kenanga Research - 1 Mar 2017