1H17 core earnings improved by +35% YoY and is in-line due to stellar top-line performance. A 13.0 sen DPS was declared (implying a dividend pay-out of 51% which is in line). Our TP of RM6.90 and MARKET PERFORM maintained as we keep a moderate outlook in 2H17.

Growth across the board. CIMB’s core net profit of RM2,283m (+35.3% YoY) is in line with our/consensus expectations accounting for 56%/51% of estimates. Improvement was across the board with fund based and Islamic banking income surging ahead at +12.5% YoY and 16.4% YoY, respectively but fee-based income eased to +15.6% (1H16: +37.0%). NIM was exceptionally well, improving by 14bps annualised (vs guidance of ~5bps compression and our expectations of 1bps compression) driven by better liability management from its overseas markets. Opex was up by +7.8% YoY but excluding forex translation, rose only by +4.0% YoY leading to Cost-to-Income ratio improving by 3ppts to 52.5% (vs industry at 49.1%) as top-line surged by 13.9% YoY. With PBT surging strong ahead YoY in its major markets except for Malaysia, PBT contributions are as follows; Malaysia (75% vs 1H16: +66%), Indonesia at 20% (1H16: 14%), Thailand at 5% (1H16: 4%) and Singapore at 7% (1H16: 5%).

Loans (exceeded expectations) grew at +8.3% YoY vs our expectation of ~7% YoY (excluding FX fluctuations at 5.5%) driven by mortgage (+9.0% YoY) and working capital (+10.4% YoY) but overall both eased YoY and QoQ. On a geographical basis, loans were driven by domestic demand at +10.0% YoY (vs domestic at +5.7% YoY), Indonesia at +2.8% and Singapore at +1.15 YoY but Thailand fell by 1.7% YoY. Deposits were high at +9.7% (but easing in both YoY and QoQ basis) with CASA growth still strong at +10.4% YoY, prompting higher CASA ratio by 20bps to 35.8%. As in loans, deposits were driven by domestic (+14.2% YoY vs industry’s 3.0% YoY) and Thailand at +2.9% YoY, but both Indonesia and Singapore fell by 2.7% and 2.5% YoY, respectively. As deposits outpaced loans, not surprisingly Loan to Deposit ratio fell 120bps to 93.0%. Asset quality was mixed as gross impaired loans (GIL) surged by 5bps to 3.21% but impairment allowances fell by 7.1%, prompting a reduction in credit charge by 5bps to 0.66% (vs our expectations of 0.63%) attributed to earlier-than expected writebacks.

Overall on track as guided. We are encouraged by the strong loans growth (exceeding target with domestic loans growing stronger than industry) and optimistic on the group achieving its target on the back of sustainable capital market activities and resolute loans and the absence of high provisions seen in FY16.

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

Valuation & recommendation. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth and downside pressure on NIMs still prevail. Our valuations are based on its 5-year average P/BV with a 0.2SD below its 5-year mean of 1.35x P/B where we utilised: (i) COE of 7.6%, (ii) FY18 ROE of 8.9%, and (iii) terminal growth of 2.5%. The 0.2SD below the mean is on concerns of MFRS9 going forward and downside risks on NIM due to another cycle of deposit taking activities: (i) as NSFR approaches, and (ii) on higher-than-expected credit demand. As total returns are still < 5%, we maintain our MARKET PERFORM view.

Source: Kenanga Research - 29 Aug 2017