CIMB Niaga’s 9M18 CNP of IDR2.59t is within expectation accounting for 79% of market estimate as asset quality improves. We resist from making any changes in forward earnings pending for the Group’s 3Q18 results later this month as management guided for better performance from domestic operations mitigating softer performance from Indonesia and Thailand. Maintain TP at RM6.15 but call raised to OUTPERFORM due to attractive valuations.

Within Expectations. CIMB Niaga, a 97.9% subsidiary of CIMB Group recorded a core net profit (CNP) of IDR2.59t for 9M18 which was in line with our/market expectations accounting for 79% of both full-year estimates. CNP growth of +18% YoY was primarily driven by lower impairment allowances (-23% YoY) as topline slumbers.

YoY, earnings supported by better asset quality and fee-based income. Topline was abysmal, marginally up (+0.5% YoY) to IDR12,670b underpinned by improved NOII (+13.1% YoY) and dragged by falling NII (-3.8% YoY) to IDR9,012b. The weak NII was due to slower loans (-80bps to +2.2% YoY and within guidance of low single- digit) coupled with weakening NIM falling by 53bps to 5.0% (within guidance). Asset quality continued to improve as GIL and credit costs fell 54bps each to 3.4% and 1.8% (within guidance) respectively.

Slight deterioration in asset quality. On a QoQ basis, earnings fell 7.5% to IDR824.1b dragged by higher impairment allowances of IDR820.8b (+12.7%) and higher opex (+8.7%) to IDR2,098b. Topline rebounded for the quarter improving at +6.2% driven by rebound in both NII and NOII at +2.3% and +16.2% respectively. NII was boosted by better NIM with an uptick of 12bps to 5.0% (due to higher CASA and better repricing of assets) as loans growth faltered (-1.6%). For the quarter, asset quality deteriorated slightly with GIL and credit costs up 2bps and 7bps, respectively, to 3.4% (mostly coming from consumer and corporate) and 1.8% respectively.

Loan traction and asset quality becoming a risk. As guided previously by management Niaga’s full-year earnings and beyond looks challenging with loans stifled by the i) upcoming impending elections and ii) Niaga not participating in the infra loans space. While FY18E NIM is expected at ~5%, we do not discount of additional downside pressure on NIM on account of further rate hikes as Indonesia’s Central bank defends the Rupiah. While asset quality YoY showed improvement, deterioration is expected ahead as interest rate slowly creeps northwards.

Forecasts unchanged for the Group as we wait for its 9M18 results expected at the end of the month. Our FY18E/FY19E earnings are kept unchanged at RM4.99b/4.98b, as we render existing assumptions to be conservative enough. Our FY18EFY19E assumptions are; i) Loans to grow at 6%/5.2%, ii) Credit charge of ~55bps for both years, iii) NIM compression by 5bps for FY18E and ROE at <10%/<9%.

Maintain TP of RM6.15 for the Group based on a FY19E PB/PE of 1.0x/12.0x. Both PB and PE are based on the 0.5SD-1SD levels below the respective 5-year mean to price in potential risks ahead i.e. challenging loans and soft capital market activities. Retracement of its share price recently has presented an attractive valuation for the stock and with potential total returns >11%, we upgrade our call to OUTPERFORM.

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 - 01 Nov 2018