CIMB Thai returned to profitability in 1Q18; brought about by a rebound in fee-based income and lower impairment allowances. However, loans growth was disappointing. As the bank historically contributed <4% to the Group’s earnings, we made no revision to our overall forecast for the Group with TP of RM7.40 and MARKET PERFORM call maintained.

Top-line rebounded. 3M18 earnings improved by 39% YoY to THB168.9m underpinned by: (i) better top-line of +8% YoY to THB3.28b and (ii) lower impairment allowances by +5% YoY but offset by a higher tax rate of 38% (vs. 20% in 3M17) and higher opex (+11% YoY). The rebound in top-line (1Q17: -6.5% YoY) was driven by stellar fee-based income of +20% YoY with fund-based income improving, by +5% YoY.Improvement in the former was mainly due to gains in financial liabilities of THB136m (vs. 3M17 losses of THB227m). The improved fund-based income was supported by higher NIM (up by 30bps) to 4.0% as loans were flattish YoY. The superior NIM was again the result of efficient funding cost management. With lower impairment allowances, credit charge fell by 20bps to 2.2% (of the total Gross loans).

QoQ, 1Q18 saw broad rebound from the previous quarter as earnings rebounded to positive territory and recorded at THB170m. The sharp rebound was due to: (i) falling opex (-11%) and impairment allowance (- 12%) despite a relatively softer (+1%) growth in top-line. The soft top- line was attributed to flattish fund-based income with a rebound in fee- based income by +6%. Equally disappointing was loans growth falling for the 3rd straight quarter (-5%) but NIM remained flat at 4.0%. Asset quality was mixed as credit charge fell by 30bps to 2.2% but asset quality deteriorated by 40bps to 5.2% as per the gross impaired loan ratio.

Moving forward, the flattish YoY loans and falling QoQ loans were disappointing as we had expected mid-single-digit YoY growth, at the least, on the back on improving manufacturing and exports growth domestically. As expected, credit charge and NIMs have improved (within our expectations of NIM: ~4% and credit charge <2.3%) and we expect stable NIMs supported by moderate credit demand ahead. In fact, we still expect demand to pick up in 2H18 to support a low-mid- single-digit growth in loans.

Forecasts. No changes to our forecasts for the Group as historically CIMB Thai’s contributions to the Group are minimal. 12M17 PBT contribution to the Group was at ~3%, and we expect it to be lower as management has guided for better loans, improved NIM and lower credit charge for the other markets namely Malaysia and Indonesia.

Valuation & recommendation maintained. For now, pending the Group’s 3M18 results expected at the end of next month, we keep our TP at RM7.40 based on a blended FY18E PB/PER of 1.24x/13.0x (previously 1.2x/13.3x. Both PB/PER are based on the 5-year historical bands. For PB, we adopt the mean level, while for PER, we peg at the - 0.5SD-level to reflect our cautious optimism for loans growth). Maintain MARKET PERFORM.

Downside risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 23 Apr 2018