While top-line improved, earnings disappointed being dragged by higher opex and credit charge. Top-line was driven by higher contribution from Non-Interest Income as loans were flat. 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 RM6.85 with the OUTPERFORM call maintained.

Earnings dragged by opex with disappointing loans. 6M18 earnings were abysmal, down by 25% YoY to THB360.1m brought about by: (i) higher operating expenses (+13% YoY), (ii) higher impairment allowances of THB2.4b (+1% YoY), and (iii) higher tax rate of 32% (vs. 6M17: 19%). Total Income of THB6.6b performed better (+7% YoY) underpinned by: (i) +5% YoY growth in net interest income (NII), and ii) +15% YoY growth in Non-Interest Income (NOII) to THB1.4b. The strong NOII was driven by 10% improvement in Net Fee & Service Income to THB988m and gains on financial liabilities of THB355b. Loans were still disappointing, continuing its flattish trajectory (vs. 2Q17: +0.5% YoY) with the positive upside in NII driven by improvement in Net Interest margin (NIM) by 10bps to 3.9%. Higher deterioration in asset quality (attributed to commercial banking loans) drove Gross Impaired Loans (GIL) higher by 40bps to 5.8% but credit charge remained flat at 2.3%.

QoQ, 2Q18 was a disappointment despite Core Net Profit (CNP) performing better by +13% to THB191m partly due to a lower tax rate of 23% vs. 1Q18: 38%. Top-line was soft (+1%) dragged by fall in NOII of 2%. Soft NII of +2% was driven by soft loans (1%) and NIM falling by 10bps to 3.9%. 2Q18 also saw further deterioration in asset quality as GIL slid by another 40bps to 5.8%

Cautious on pick-up in 2H18. The flattish YoY loans were disappointing as we had expected mid-single-digit YoY growth, at the least, on the back on improving manufacturing and export growths. 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. We are cautious on the expected demand pick-up in 2H18 to support a low- mid-single-digit growth in loans as CIMB Thai seemingly unable to ride on the back of Thailand’s strong GDP of 4.8% in 1Q18.

No changes to our forecasts for the Group as historically CIMB Thai’s contribution to the Group is minimal. 1Q18 PBT contribution was at 6% (6M18 PBT contribution against consensus PBT is at ~2% vs 12M17 PBT contribution: ~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 6M18 results expected at the end of next month, we keep our TP at RM6.85 based on a blended FY18E PB/PER of 1.0x/12.4x 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 from the ongoing global trade friction and the government’s austerity drive post GE14. OUTPERFORM call maintained as valuations are undemanding.

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 - 20 Jul 2018