CIMB results were disappointing, accounting for 43% of our estimates. While management is still optimistic of improved performance in 2H18, we lowered our earnings by 3% to account for weaker performance of fee-based income. TP and Call lowered to RM6.40 and MARKET PERFORM, respectively.

Disappointing. At first glance, the group recorded 6M18 CNP of RM3.3b which exceeded expectations, accounting for 64%/67% of our/market estimates due to gains of RM928m (disposal of 20% stake in CPAM or CIMB Principal Asset Management & 10% stake in CPIAM or CMP Islamic Asset Management) and RM163m (disposal of 50% stake of CSI or CIMB Securities International). However, after stripping of these gains, CNP accounts for only 43%/45% of our/market estimates. It has also declared an interim DPS of 13.0 sen/share (in line).

Positive from loan traction and asset quality. 6M18 CNP surged ahead by 44% on account of the RM1.1b gains. Top-line was poor, falling by 7% YoY on account of falling NII and NOII (-10% YoY and - 14% YoY respectively) mitigated by surging Islamic banking income (+27% YoY). Abysmal NII was dragged by NIM compression of 30bps (dragged by Niaga) as loans grew by 3.0% (vs. guidance/expectation/systems of +6%/<5%/~4%). Overall broad-based growth seen across the region with Malaysia’s contribution to Group loans rising 3ppt to 60% (with Niaga’s contribution falling 2ppt to 17%). Fall in NOII was due to a weak 2Q (-22% QoQ mainly due to forex losses for the period). On a positive note, asset quality improved slightly as GIL dipped 4bps to 3.2% with credit charge falling 20bps to 0.46% (vs. guidance/expectation of 55-60bps/40-45bps). Although opex fell, CIR remained flattish at 52% (vs. industry’s 48%). QoQ, stripping of the gains, CNP fell 23% to RM889m as top-line fell 5%, dragged by NII and NOII (-2% and -22% respectively). Loans continued to show traction at 2% (vs Q1: <1%) but sinking NIM (by 8bps) dragged NII. Further strengthening of asset quality seen as both GIL and credit charge fell 5bps and 7bps, respectively.

Challenging but management remains optimistic. Despite uncertainties arising from recent domestic and external geo-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. Its loans target of ~6% is doable on account of robust growth from the domestic front while loans growth is facing challenges in Indonesia (Presidential elections) and Thailand (as the business environment is not conducive). Niaga’s NIMs is still a challenge with the drag in corporate/SME loans to offset its mortgage book, of which the interest spread is a bit low but traction in group’s CASA outpaced other deposits, which should support its NIM target. Domestic capital markets have been slow but management expects it to show improvement in later months of the year supporting its NOII.

Revised earnings. We lowered our FY18E earning by 3.4% to RM4.93b as we slashed our NOII by 19%. We maintain our conservative assumptions of: (i) loans growth of ~5%, (ii) 11bps NIM contraction, and (iii) credit charge of 40-50bps. TP and Call lowered. Our TP is now at RM6.40 (from RM6.85) based on a PB/PE of 1.0x/12.4x with the PB 0.5SD-level below its 5-year mean to reflect the on-going challenges ahead. Downgrade to MARKET PERFORM as potential returns are <9%.

Source: Kenanga Research - 30 Aug 2018