CIMB Thai’s 3M17 performance was below expectations with core earnings slower than expected YoY, but it rebounded QoQ. Asset quality improved and we view CIMB Thai positively for FY17 given the improving NIMs and the absence of high provisions. 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 RM5.55 and MARKET PERFORM call maintained.

Not a good start with earnings dragged by top-line. CIMB Thai’s 3M17 earnings of THB121m (-63% YoY) was below consensus expectation of a THB1.9b net profit. Earnings was dragged by feebased income falling drastically (-33% YoY) mitigated by a moderate rise in fund based income (+3.0%). Lower gains from forex & trading (-79% YoY) and investment (-99%) dragged the overall performance of fee-based income. The modest gain (+3% YoY) in fund-based income was driven by improved NIMs by 9bps to 3.7% due to efficient funding cost management as net loans declined by 1% YoY.

Strong deposit growth of 15% vs declining loans (-1%) pushed Net Loan deposit ratio (LDR) lower by 17ppts to 106%.

Cost to Income ratio (CIR) surged by another 3ppts to 58% due to dismal top-line declining faster than opex (-0.5% YoY) which was outpaced by top-line growth of 6%.

Year-on-year saw further deterioration in asset quality with impairment allowances up by (+7% YoY) attributed to higher NPL by 3ppts to 6.3%. The rise in provisions saw credit costs ticked up by 8bps to 2.34%. Loan loss coverage ratio fell by 24 ppts due to the surge in NPL YoY. Capital ratios improved YoY as Tier-1 capital and Total capital improved 30bps and 170 bps to 11.1% and 16.7%, respectively.

Outlook. We still view that CIMB Thai will be able to turn positive for FY17, with lower provisions given that loan loss provisioning is expected to peak by then. Profitability will be supported by writebacks as corporate cash flows improved due to the expected stable economy. We are cautious on its target of 5-10% loans growth (vs. FY16: 3.7%) given the slow-moving Thai economy with the Bank of Thailand maintaining its interest rates at 1.5% to spur growth. We believe a mid-single-digit growth is 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 bank’s 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 3M17 results expected at the end of next month, we keep our GGM-TP of RM5.55. This is based on a 1.02x FY18E P/B where we utilised: (i) COE of 8.4%, (ii) FY17E ROE of 8.5%, and (iii) terminal growth of 2.5%. Maintain OUTPERFORM.

Source: Kenanga Research - 21 Apr 2017