CIMB Thai’s 3M18 earnings exceeded our expectations accounting for 41% of our full-year estimates; attributed to lower than expected impairment allowances. Asset quality improved in tandem with the lower impairments. We made no revision to CIMB Group earnings pending the release of its results next month as generally CIMB Thai’s contribution is minimal. Upgrade our call for the Group to OUTPERFORM as valuations are undemanding. TP of RM6.10 maintained.

Lower Impairments a surprise. YoY, 3M19 CNP of THB325m improved +92% mainly attributed to falling impairment allowances (- 17%) to THB971m and gains on sale of NPL of THB169m. Top-line declined by 2%, dragged by falling fee-based income (-26%) to THB507m despite a +4% uptick in fund-based income to THB2.71b. Fund-based income improvement was supported by higher loans (+16%) despite NIM shedding 105bps to 3.8% due to higher funding costs. Opex saw a 6ppt uptick, in line with the bank’s transitional expenses. Asset quality improved as Gross Impaired Loans (GIL) fell 90bps to 4.3% with credit costs falling 51bps to 1.7% (vs. estimate of >2% due to higher provisioning in preparation of FRS9).

QoQ, CNP of THB325m rebounded from negative territory, due to falling impairment allowances (-39%) and gains from NPL sales. Topline fell (-3%) to THB3.21b as both fund-based and fee-based income fell 3% and 1%, respectively. The weak fund-based income was dragged by falling NIMs (54bps) to 3.8% with slower loans (+2%), for the 3rd consecutive period despite the accommodative interest rates. Asset quality continued to be stable with GIL stable at 4.3% and credit charge falling 120bps to 1.7%. (The higher base of 2.9% before was due to provisioning in preparation of FRS9 in 2020).

Maintained higher credit charge for FY19E. We maintained our view of uptick in credit charge due to the new guidelines from the BOT (FRS9 provisioning). Double-digit loans growth was a surprise but was due to a lower base as 1Q is generally a weak quarter. Loans will likely moderate (from SMEs and corporates); but expected to be driven by consumer demand (as interest rates are still accommodative despite the 25bps hike to 1.75% in Dec 2018). We also expect downside pressure on NIM due to competitive lending ahead. We maintain our view of improved FY19 earnings ahead at THB790m based on these assumptions; (i) loans growth of <6%, (ii) NIM at <4.0%, (iii) credit costs at 230bps, (iv) CIR at 57%, and (v) tax rate at <22%.

No changes to our forecasts for the Group, as historically CIMB Thai’s contribution to the Group is minimal (at <7%). FY18 PBT contribution was at 6%. The Group’s 3M19 results are expected at the end of next month, thus FY19E earnings of RM4.7b are maintained for now; based on the following assumptions: (i) loans growth of ~5.5%, (ii) NIM compression at 10bps, and (iii) credit charge of 45bps.

Upgrade Call but TP maintained. At RM6.10 we maintained our TP based on a target PBV of 1.0x implying a 0.5SD-level below its 5-year mean to reflect the on-going challenges and volatility ahead. As valuations are undemanding with potential total returns >10% we upgrade our call for the Group to OUTPERFROM. 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 - 19 Apr 2019