Although lending activities improved, CIMB Thai 9M18 earnings were dragged by higher opex and weaker capital markets. On a positive note, asset quality improved, as expected, with impairment allowances mitigating the fall in earnings. As the bank historically contributed <5% to the Group’s earnings, we made no revision to our overall forecast for the Group. TP of RM6.40 is also maintained but downgrade our call to MARKET PERFORM on account of uncertainties ahead and soft capital markets.

Disappointing earnings YoY dragged by opex and capital markets. 9M18 earnings was a disappointment dragged by higher opex (+11%) mainly from higher personnel costs in line with the Bank’s forward expansion. Notwithstanding that, operating profit improved +16% as allowances for impairments fell 10% to THB3.33b. Topline improved considerably albeit at +3% YoY as NII grew 4% due mainly to significant loans growth (+6%) as NIM fell by 4bps to 4.5%. Nevertheless, topline was dragged by disappointing NOII (-4% YoY) mainly due to falling gains in investments (-78% YoY) and trading & forex (-93% YoY). Asset quality was stable with GIL flattish at 5.7% with credit costs falling 19bps to 2.1%.

QoQ, 3Q18 was a disappointment after a strong 2Q, earnings fell 7% to THB177m as topline fell (-4%) and higher opex of 10%). Topline (- 4%) was dragged by falling NOII at -28% (from falling gains in investment and trading & forex). Further improvement in loans (+9%) but NIMs fell 18bps to 4.6% from falling yields in assets. Asset quality improved for the quarter as both GIL and credit costs fell by 10bps and 60bps respectively.

FY18E earnings likely dragged by weak capital markets. While loans showed sign of picking up in 3Q, it came with a price; lower yielding assets (indicating price war) with higher deposit intakes to catch up with credit demand undermining NIM but mitigated by falling impairment allowances. Guidance for mid-single-digit growth for FY18 seems achievable but weak capital markets activities likely to be the theme for 2H18, dragging its topline growth (9M18: <19% vs 9M17: >20%) hence challenging earnings for FY18.

No changes to our forecasts for the Group as historically CIMB Thai’s contribution to the Group is minimal (<5%). 1H18 PBT contribution was at 8%, but we expect to be lower for 9M18 as Group management has guided for better loans, improved NIM and lower credit charge for the other markets namely Malaysia and Indonesia.

No change in earnings. For now, pending the Group’s 9M18 results expected at the end of next month, forecast earnings maintained for now. We have previously 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 is maintained at RM6.40 based on a PB/PE of 1.0x/12.4x. Note that the target PB of 1.0x is 0.5SD-level below its 5-year mean to reflect the on-going challenges ahead. However, our call is downgraded to MARKET PERFORM (although potential returns are bordering ~10%) as volatility on capital markets and uncertainties on policy direction will likely constrict corporate loans dampening overall earnings for the Group.

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 - 22 Oct 2018