Coming from a recent meeting with management we reiterate our TP of RM6.10 with an OUTPERFORM call. The recent infra newsflow is unlikely to shift CIMB’s loan target of +6% YoY, but credit costs and NIM compression should be on target, with fee-based income expected to improve QoQ (albeit coming from a low base). No change to our earnings as we feel our assumptions are fair enough.

Maintaining loans target. Despite recent developments in the domestic front (resuscitation of several infra projects), management maintained its FY19E loan target of ~+6% (Malaysia at +6-7% and Indonesia at ~5%). Although management seen loans momentum picking up in 1Q19 with corporate loans momentum on an uptrend from 4Q18, pickup in domestic corporate loans is expected to come in play by 4Q19/1Q20. In the meantime, the Group’s credit demand will be supported from the consumer side. Management highlighted that infra/construction pick-up will be not be a game-changer for the Group for 2019 as management expects for CIMB to benefit only by end of 2019 onwards. Niaga’s credit demand will still be supported from the consumer segment as mortgages booking are looking strong supported by resurgent demand for auto-loans which is expected to come in by 3Q19. Management also guided that Niaga will benefit slightly from expected ramp-up in infrastructure spending with recent conclusion of the Indonesian Presidency.

NIM as guided. No change either for Group’s NIM as guided before (5- 10bps) compression with Niaga’s NIM expected to ~5% with Malaysia’s NIM at a 5-10bps compression. Deposit pressure is prevailing in Malaysia and Indonesia (undermining NIM) with Thailand’s NIM pressure coming from the switch to safer but lower yielding loans.

NoN-Interest income looking good QoQ. Management guided for better QoQ fee-based income albeit a weak YoY. Both Deal activities and fee-income were weak but treasury & capital markets saw improvement from 4Q18. Activities from treasury & capital markets expected to be better in 2H (coming from a low base).

Lower provisioning expected. Credit costs are expected as guided (40-50bps) as management does not expect significant provisioning ahead. Expect similar provisioning for 1Q19 as previous corresponding quarter (vs 4Q18 provisioning; 34bps). Management also highlighted that the Group has the scope in selling some of its NPLs (Malaysia and Indonesia) and likelihood of happening in 2H19 (FY18: GIL at 2.9% vs FY17: 3.4%) . Niaga’s provisioning are looking likely less thus FY19E credit costs are expected in the range of 140-150bps (from the previous guided 150-200bps).

Earnings maintained. 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.

TP maintained for the Group at RM6.10 based on an unchanged target PBV of 1.04x implying a 0.5SD-level below its 5-year mean to reflect the on-going challenges and prevailing volatilities. Valuations are undemanding; with potential returns >10% coupled with a decent dividend yield of 4.3%, we reiterate our OUTPERFORM call for the Group.

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 - 29 Apr 2019