At a meeting yesterday, management is generally satisfied with the group’s performance so far. According to them, the Group is on track to meet most of its targets. Recall that its FY17 targets are; (i) ROE at 9.5%, (ii) Loans growth at 7%, (iii) NIMs to compress by 5-10bps, (iv) credit costs of between 60bps to 65bps, and (v) dividend pay-out ratio of 40% to 60%. Asset quality is seen stable with no significant deterioration issues from its core operations in Indonesia, Thailand and Malaysia going forward.

Asset Quality stable with no sign of further deterioration. Generally, management is quite satisfied with the Group’s asset quality with no significant uptick seen in 1Q17. For Thailand sales of Non-Performing Loans are done with management expects credit costs around the 150bps range (recall that CIMB Thai’s credit cost was at 300bps for FY16). Asset quality at CIMB Niaga is stable but no sharp improvement in 1QFY17. There is no significant buildup in deterioration of assets that points to a new cycle of credit costs, but management still expects elevated credit costs for 1QFY17. Management targets Niaga’s credit costs of around 200-220bps for FY17. (FY16: ~ 260bps). As for the Malaysian operations, no significant deterioration issues transpiring with domestic assets looking overall stable.

NIMs to be compressed as expected. While NIMs compression is likely to be around 5-10bps for FY17, management added that NIMs from Niaga are looking better but Malaysia likley not. Recall that earlier this year, management guided for overall group compression are likely to come from Indonesia while Malaysia will be lesser. Niaga’s improved performance will be driven by strong CASA growth offsetting the declining loans and lending yields. The absence of high demand for credit will offset funding costs aiding better NIMs performance. Although management has yet to see signs of intense deposit taking activities on the domestic front, management does not rule out renewed pick-up of funding costs with the coming of NSFR in 2018.

Overall on track as guided. Overall, management reiterated that it is on track to meet FY17 targets. CIMB Thai’s profitability is expected to be normalised with the absence of high provisions that was seen in FY16. Improvements will also be driven by growth from its retail side and lower opex with reduced branches (to 75 from 92 at present by end of 2017). Asset quality issue seems to have stablised in Singapore with signs of business picking up. Capital market activities in the domestic front are also seen to be picking up with more equity activities seen in 1Q17 than the whole of FY16. Pipeline for the domestic capital markets also looks healthy.

Forecasts & risks. No change to our FY17 forecasts as we render existing assumptions to be conservative at present.

Valuation & recommendation. With issues on asset quality receding, other challenging headwinds such as moderate loans growth and downside pressure on NIMs still prevailing, our valuations are based on its 5-year average P/BV but with variance of between -0.5 to -1.0 SD to reflect challenging conditions. Our GGM-TP is maintained at RM5.55 on a 1.02x FY18E P/B where we utilised: (i) COE of 8.41%, (ii) FY17 ROE of 8.5%, and (iii) terminal growth of 2.5%. We maintain MARKET PERFORM given the prevailing challenges.

Source: Kenanga Research - 20 Apr 2017