CIMB Niaga’s 6M18 CNP of IDR1,768b is within expectation accounting for 53% of market estimate with strong fee-based income mitigating poor performance from fund-based income as NIM comes under pressure. We resist from making any changes in forward earnings pending the Group’s 2Q18 results later this month as management guided for better performance from domestic operations mitigating weaker performance from Indonesia and Thailand. Maintain OUTPERFORM at a TP of RM6.85.

Within expectations. 6M18 core net profit (CNP) of IDR1,768b is within expectations accounting for both our/market estimates at 53% of full-year estimates. CNP growth of 28% was primarily driven by strong fee-based income aided by lower impairment allowances.

Strong earnings led by fee-based income. YoY, 6M18 earnings of IDR1,786b was driven by strong fee-based income (+13% YoY) and falling impairment allowances of 24% YoY. Top-line growth slid 1% YoY, dragged by falling fund-based income of 5% YoY as loans growth was soft at +3% YoY (vs. system growth of ~+11% YoY) with NIM compressing by 73bps to 4.9% (vs. guidance of ~5%). No concerns on asset quality as it improved further with GIL falling by 50bps to 3.4%; hence, credit charge fell 53bps to 1.8% (vs. guidance of ~2.0%). QoQ, it was a soft quarter, as top-line fell 5% dragged by falling fee-based income of 10%. CNP was weak at 2%, supported by falling opex and impairment allowances of 2% and 11%, respectively, as top-line softened. On a positive note, loans growth rebounded by 4% QoQ from the preceding quarter led by commercial banking (+4%) and corporate banking (+7%) mitigated by flattish consumer banking. NIM continued to be under pressure, falling by 20bps to 4.9%. Sequentially asset quality continued to improve as GIL fell another 11bps to 3.4% with credit charge easing another 22bps to 1.7%

Loan traction becoming a risk due to external and internal factors. While management is still hopeful of achieving its loan target of mid- single-digit and NIMs of ~5%, we find this challenging with incoming external and domestic headwinds. Downside risks to loans growth are becoming clear with additional impact coming from the protracted trade war and concerns of slowdown from the emerging markets adding to the stifling loans due the approaching presidential election in April 2019. Further downside pressure on NIM is expected despite the expected additional rate hikes in the later part of the year as repricing of deposits are concurrent with the rate hike with the added concern of re-pricing loans to customers stifling loans and adding risks of further deterioration in asset quality.

Forecasts unchanged for the Group as we wait for its 6M18 results expected end of the month. Our FY18E earnings is kept unchanged at RM5.1b, as we render existing assumptions to be conservative enough. Our FY18E assumptions are; (i) ROE at 10% (ii) Loans at 5% (iii) Credit cost of 58-60bps, and (iv) NIMs compression of 10bps. We, however, expect contribution from Niaga to overall Group PBT to be lower from 14.4% to <14% for FY18 due to revision of our loans growth expectations to <4% (from 5%) and NIM to be <5%.

Maintain TP of RM6.85 based on a FY19E PB/PE of 1.0x/12.4x. Both PB and PE are based on the 0.5SD level below the respective 5-year mean to price in view of potential risks ahead. Maintain OUTPERFORM due to a potential upside of ~20%.

Source: Kenanga Research - 16 Aug 2018