CIMB’s Group 97.9% subsidiary CIMB Niaga (Niaga)’s 6M17 core earnings of IDR1,380b was in line, accounting for 50% of consensus estimate, mainly attributed to lower provisioning and healthier NIM. No dividends were announced as expected. Earnings forecasts for the Group are left unchanged. TP of RM6.90 maintained, but downgrade to MARKET PERFORM with the recent push in its share price.

Earnings boosted by lower impairment allowances and healthier NIM. Year-on-year, Niaga’s higher 6M17 net profit of IDR1,380b (+87.5% YoY) was attributed to lower loan loss provisions, lower tax rate and improved top-line revenue at 7.4% YoY. Improvement in topline was driven by higher Net Interest Income (NII) at 8.9% and NonInterest Income (+3.2% YoY). Widening NIM (52bps) boosted NII growth as loans growth was slower (at +2.8% YoY vs system loans of +~9% YoY). The widened NIM was boosted by improved CASA ratio of 55.1%, improving by 310bps and efficient liability management. Deposits (-9.6% YoY) did not grow in tandem with loans, which led to Loan-to-deposit ratio (LDR) surging ahead by 13ppts to 111.2%. On a quarterly basis, CNP rebound by 15.8% to IDR741b, driven by better top-line of 3.5% mitigated by higher impairment allowances of IDR1,043b (+4.7%). NII rebound by 4.4%, boosted by healthier NIM by 221bps to 5.8%, which was compounded by a rebound in loans (+2.4%). Despite industry loans growing ~1.3%, Niaga’s loans growth was faster driven by commercial and corporate banking at +3.6% and +5.8%, respectively with consumer loans falling 1.4%.

Outlook remains the same. The Indonesian economy remains soft and management guided for a softer environment in 2H17 with no strong catalyst in sight. 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 type 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. Management guided for softer NIM in 2H17, which is likely to hit ~5%. 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 NPL. Management guided for still elevated credit cost at ~2.3%.

No change in forecasts. Earnings forecasts for the CIMB group are left unchanged as results were in line. With pressure coming from moderate loans, compressing NIM and still elevated credit cost in 2H17, we expect Niaga’s contribution to overall Group’s PBT to be immaterial.

Valuation & recommendation. Pending the Group’s 2Q17 results next month, we maintain our GGM-TP at 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 0.2SD below mean is on concerns of MFRS9 going forward and downside risks on NIM due to another cycle of deposit taking activities as: (i) NSFR approaches, and (ii) higher-than-expected credit demand. With the recent push in its share price, total returns are <10% and we downgrade it to MARKET PERFORM.

Source: Kenanga Research - 1 Aug 2017