CIMB Thai’s 6M17 performance was below consensus estimates, but overall core earnings improved both YoY and QoQ. We view CIMB Thai positively for FY17 given the improving NIM and the absence of high provisions. As the bank contributed ~6% to the Group earnings, we made no revision to our overall forecast for the Group with TP of RM6.90 but revised to OUTPERFORM due to undemanding valuations.

Earnings supported by lower opex and impairment allowances. CIMB Thai’s 6M17 earnings of THB478m (+30% YoY) were below expectations accounting for 32% of THB1.48b estimate. Earnings were boosted by fund-based income improving modestly by 2.1%% YoY and falling opex of 2% and falling impairment allowances (-6.2% YoY) but mitigated by falling fee-based income of 18.9% YoY. Fee-based income dismal performance was attributed to gains on trading & forex falling by 40.6% but offset by better net fee & service income (21.4% YoY) and lower financial liabilities losses of 44.6% YoY to THB1.08b. The modest gain (+2% YoY) in fund-based income was driven by slightly better NIMs by 3bps to 3.8% due to efficient funding cost management as gross loans were almost flattish (0.5% YoY). Stronger deposit growth of 3% YoY loans pushed loan deposit ratio (LDR) lower by 3ppts to 122%. Cost to Income ratio (CIR) was slightly lower by 40bps to 55% as top- line revenue fell by 3% vs falling opex of 2.0%. Asset quality was mixed for the period under review with NPL higher by 110bps to 5.4%, but on a positive note credit cost was 20bps lower to 2.3% due to falling allowances for impairments (-6.2% YoY). Loan loss coverage ratio fell by 7 ppts to 84.0% but total provisions stood at THB9.5b, translating to a THB3.3b excess over the Bank of Thailand’s reserve requirements. Capital ratios were better than a year ago as Tier-1 capital and Total capital improved 310bps and 350 bps to 13.2% and 18.6%, respectively. With better earnings, annualized ROE was up by 60bps to 3.4%.

Lower provisions and stable NIM to support growth. Our view is that CIMB Thai will turn positive for FY17, with lower provisions given that loan loss provisioning is expected to peak by then. Profitability will be supported by write-backs as corporate cash flows improved due to the expected stable economy. We are sceptical on its target of 5-10% loans growth (vs. FY16: 3.7%) given the moderate Thai economy with the Bank of Thailand maintaining its interest rates at 1.5% to spur growth. We believe a lower-single-digit growth is more 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 supported 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 contributions are unlikely to impact the Group. 1Q17 PBT contribution to the Group was only ~6%.

Valuation & recommendation maintained. For now, pending the Group 6M17 results expected at the end of next month, we keep our GGM-TP of RM6.90, based on a 1.26x FY18E P/B (a 0.2SD below its 5-year mean of 1.35x PB) where we utilised: (i) COE of 7.6%, (ii) FY18E ROE of 8.9%, and (iii) terminal growth of 2.5%. The slight SD below mean is on still concerns of MFRS9 in 2018 and downside risks on NIM due to another cycle of deposit taking activities as: (i) NSFR approaches, and (ii) higher-than-expected credit demand. As total returns are >10% with undemanding valuations, we revised upwards to OUTPERFORM.

Source: Kenanga Research - 20 Jul 2017