While 3M18 results are in line, we slashed our FY18E earnings on concerns of weaker loans ahead. With softer loans and NIMs, this quarter earnings were supported by lower opex and impairment allowances. After rolling our valuation forward to FY19E, we slashed our TP to RM6.85. With attractive returns due the recent sharp retracement, we upgrade our call to OUTPERFORM.

In line. 3M18 CNP of RM1.3b is in line with our/market forecasts, accounting for 25% of both estimates. No dividend was declared, as expected.

YoY, 3M18 CNP surged ahead by 11% on the back of lower opex (-7%) and impairment allowances (-6%). However, stripping out the RM152m gains from the disposal of China Galaxy, CNP would have fallen by 2%. Top-line was abysmal, falling by 5%, dragged by fund and fee-based income with both falling 8% each. Islamic banking income growth of +25% is within our expectation. Abysmal fund-based income was dragged by muted loans growth (+0.5% vs +6% target) and compressing NIM (by 30bps vs 5-10bps compression) mainly due to contraction from Indonesia as well as weak Singapore and Thailand markets. Slight uptick in GIL by 5bps to 3.2% but credit charge at 49bps was within expectation and below guidance. Although opex fell, CIR of 52% is above target/estimate of ~50%.

QoQ CNP improved by 23% due to the recognition of the abovementioned disposal. Stripping the one-off gain, CNP would have been at +9%. Nevertheless, the improvement in CNP was attributed to falling opex and impairment allowances (at 7% and 37%, respectively) as top-line declined by 7%. Falling top-line was broad-based with fund and fee-based income declining by 4% and 15%, respectively, with Islamic income falling by 4%. Loans were flat (+0.6%) with NIM contracting further by 13bps to 2.4%. However, asset quality improved as GIL fell 17bps to 3.2% with credit charge falling by 22bps.

Loans growth will be a challenge. Despite uncertainties arising from recent political events, CIMB maintained its guidance of; (i) ROE of 10.5%, (ii) strong loans at 6%, (iii) 5-10bps NIM contraction, and (iv) credit charge of 55-60bps. Loans will be supported by consumer spending with wholesale pipeline still strong with expected uplift from Indonesia corporate banking. We remain concerned on its loans target based on the recent developments; thus, slashed our loans estimate by 1ppt to ~5% for FY18 and ~6% for FY19. While we remain comfortable with our credit charge estimation of 58bps for FY18, we slash our NIM estimation from 4bps to 10bps for FY18 but expect flattish NIMs for FY19. No change to our CIR of <50% for both FY18 and FY19.

Revised earnings. We slash our FY18E earning by 1.4% to RM5.11b but slight uptick (by +0.6%) to RM5.4b for FY19 based on the above assumptions.

TP reduced, but Call upgraded. Our TP is now at RM6.85 (from RM7.40) based on a PB/PE of 1.0x/12.4x as we roll over our valuation to FY19E. Both PB and PE are based on the 0.5SD-level below the respective 5-year mean to reflect our cautious optimism for its loans growth. With current retracement in its share price and potential total returns of ~20%, we upgrade CIMB to OUTPERFORM.

Source: Kenanga Research - 31 May 2018