CIMB Niaga (Niaga)’s 3M17 core earnings of IDR640b was within expectations, accounting for 22% of ours and consensus’, mainly attributed to lower provisioning and lower opex. No dividends were announced as expected. Earnings forecasts for the Group are left unchanged. TP of RM5.55 maintained but downgrade to UNDERPERFORM call maintained.

Operational efficiency continued to drive improvements. Yearon-year, Niaga’s 3M17 net profit IDR639.5b (+138% YoY) was mainly attributed to lower loan loss provisions, lower opex, lower tax rate and improved revenue at 8% YoY. Improvement in top-line was driven by higher Net Interest Income (NII) at 9% and Non-Interest Income (+4% YoY). Widening NIM (57bps) boosted NII growth as loans growth was slower (at +3% YoY). The widened NIM was boosted by improved CASA ratio of 56%, improving by 4ppts. Deposits (-4% YoY) did not grow in tandem with loans which led to Loan-to-deposit ratio (LDR) surging ahead by 7ppts to 106%.

Not benefitting from Indonesia’s infrastructure spending. On a quarterly basis, CNP was down by 18% to IDR640b, dragged by falling top-line of 5% despite falling opex (-22%) and falling impairment allowances (-11%). NII fell by 4%, dragged by falling NIMs by 21bps to 5.6% which was compounded by declining loans. Despite industry loans growing above 8%, Niaga’s loans growth was slower as consumer and private spending failed to take off.

No change in cautious outlook. Recall that earlier this year, management guided for a high single-digit loan growth for 2017 but had since guided for a mid-single-digit growth as Niaga is unlikely to benefit from the Indonesia’s infrastructure spending and the focus will still be on SME and consumer segments. Private spending and consumption were not picking up as expected and Niaga is refraining from big-ticket items lending as this kind of lending is long term in nature with lower yields compared to SME loans. As LDR is still high, we believe downside pressure on NIM will continue with Niaga already lowering its financing rates in selective segments in order to entice customers. 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 the CIMB group are left unchanged. With pressure coming from moderate loans and compressing NIMs, we expect Niaga’s contribution to overall Group’s PBT to be immaterial.

Valuation & recommendation. Pending CIMB Group’s 1Q17 results next month, we maintain our GGM-TP 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%. With a potential return of less than 3% we downgrade our call to UNDERPERFORM.

Risks to our call are: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans and deposits growth, (iii) better-thanexpected asset quality, (iv) improvement in capital market activities, and (v) less volatile currency exchange.

Source: Kenanga Research - 28 Apr 2017