CIMB Group's 97.9% subsidiary CIMB Niaga (Niaga)’s 9M17 core earnings of IDR2,197b was above market estimates at 83%, mainly attributed to lower provisioning and healthier NIM. No dividends were announced as expected. Earnings forecasts for the Group are left unchanged. Maintain TP of RM6.90 and OUTPERFORM call.

Earnings boosted by lower impairment allowances and healthier NIM. Year-on-year, Niaga’s higher 9M17 net profit of IDR2,197b (+69.2% YoY) was attributed to lower impairment allowances, healthier NIM and lower tax rate. Top-line improved by 5.4% YoY on the back of improvements in both fund (+5.4% YoY) and fee (+5.3% YoY) based income. Widening NIM (18bps to 5.5%) and rebound in loans (+3.0% YoY vs system ~8% YoY) supported fund-based growth. Fee-based income was boosted from gains on sale of financial assets & realised gains of derivatives by 44.3% to IDR812.6b. Stronger deposits growth at 4.8% YoY (vs system growth of ~9% YoY) forced loan-to-deposit ratio to slide by 2ppts to 95.5%. Asset quality improved as Gross Impaired loans ratio (GIL) and credit costs improved to +3.9% (by 26bps) and 2.3% (by 35bps as impairment allowances fell by 13.5% YoY), respectively. Marginal rise in opex (+1.0% YoY) forced Cost-to- Income ratio lower (by 2ppts) to 44.6%.

QoQ earnings improved by 10.3% QoQ to IDR816.9b due to lower operating losses (-34.6%). Broadly, top-line fell (-2.1% QoQ) with fund- based income falling by 6.0% QoQ but mitigated by stronger fee-based income of 9.8% QoQ. Pressure on fund-based income was exacerbated by falling loans (-0.8% QoQ) and NIM (down 44bps to 5.4%). Despite weak loans growth, deposits grew faster at 15.6% prompting LDR lower by 16ppts to 95.5%. Asset quality was mixed with GIL up by 6bps to 3.9% but credit costs remained at 2.4%.

Outlook remains the same. The Indonesian economy remains soft and management guided for a softer environment ahead. Recall that management had guided for a mid-single-digit growth. Management guided for softening NIM ahead, likely to hit ~5%. Although asset quality is expected to prevail as management continues managing down its exposures from sensitive portfolios (such as auto), management is still cautious on its outlook and maintained elevated credit cost at ~2.3%.

No change in forecasts. Earnings forecasts for the CIMB group are left unchanged although Niaga’s results were stellar. With pressure coming from moderate loans, compressing NIM and still elevated credit cost, we see softening earnings in 4QFY17 for Niaga. Recall last month guidance from the Group’s management of soft performance from Niaga; hence, we are comfortable with our conservative assumptions as follow: (i) ROE at 8.6%, (ii) Loans growth of ~6.5%, (iii) Credit cost of around 65bps (unchanged), (iv) CIR at < 53%, and (v) NIM compression of 1bps.

Valuation & recommendation. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth still prevail. The recent sharp fall in its sharp price has made the stock looking attractive with decent dividend yield of 3.2% supporting attractive returns of >10% to our TP of RM6.90. 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. (Note that the adoption of 0.2SD below mean is on concerns of MFRS9 going forward.) OUTPERFORM.

Source: Kenanga Research - 01 Nov 2017