Following a recent meeting with management, we reiterate our Market Perform call but reduced our TP to RM6.15. Management guided for achievable loans growth of ~6% for FY18 but cautious for FY19, (with domestic loans expected to be slower by 1ppts). Management also guided for a relatively flattish NIM for FY18 (from the earlier expectation of 5-10bps contraction) with credit charge also expected to be recorded at around the lows 50bps (as opposed to the previous expectation of 55-60bps).

Loans growth achievable but facing downside risks. Management expects its loans target of ~6% (with domestic loans expected between 6-7%) to be doable on account on resilient retail spending. Domestic corporates loans which have been slowing since post GE14 with management expects pick up only to occur in 1H19. FY18 home market loan book is expected to be driven by retail, which is growing at 1.5-1.8x the industry. Challenging loans growth is also coming from Indonesia in 4Q18 and into 1H19 undermined by the upcoming Presidential elections (April 2019). As highlighted before Niaga is not participating in the infra and subsidised retail space and with the corporate space slow due to the impending elections, loans for Niaga is expected to be on the low single digit for FY18E. As seen in its recent 3Q18 results, CIMB Thai loan book is doing fine with FY18 loans expected to grow 6-7%. Overall, the management is cautious for 2019 and expect loans to be driven by corporates with retail likely to taper. With the expected slowdown next year, management guided for slower loans (domestic loans to grow 1ppts lower than FY18E). Revised NIM. To recap management earlier guided for a 5-10bps compression but revised for a relatively flat overall for FY18E, on account of stable NIMs from all markets with the exception of Indonesia. Indonesia is still facing downside pressure (but likely to face a ~5% NIM as expected) partly due to the recent spate of rate hikes undermining NIM with repricing of assets to fully impact only by year end.

Asset quality stable. Management highlighted satisfactory asset quality across the board with credit charge revised from the high 50s to the lower 50s bps. Thailand’s credit costs are coming down (as SME loan book is shrinking) and so do Indonesia. Management expects Niaga’s credit charge shrinking to 150bps by year end (1H18: 177bps) with Thailand ending at <150bps. CET1 under pressure. Management also guided for lower CET1 (1H18: 13%) due to the weak rupiah. Management estimated for every 10% fall in the Rupiah against the Ringgit, capital likely eroded by 10bps but CET1 not expected to dip below the 12% mark.

Revised estimates. We tweaked our earnings conservatively for FY18E/FY19E by 1.3%/-2.3% to RM5b/4.9b based on these assumptions; i) Loans at 6%/5.2% (previously 5%/5.5%, ii) Credit charge of ~55bps for both years (unchanged), iii) NIM compression by 5bps (10bps previously for FY18E) and ROE at <10%/<9% (previously <10%/>9%). TP reduced, but call maintained. With the revision in earnings, our TP is now reduced to RM6.15 (from RM6.40 previously) based on a PB/PE of 1.0x/12.0x (previously 1.0x/12.4x). Both PB and PE are based on 0.5SD-1.0SD levels below their respective 5-year mean to price in of potential risks ahead i.e. challenging loans and soft capital market activities. Maintain Market Perform.

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 - 23 Oct 2018