CIMB Thai’s 6M19 earnings were within our expectation accounting for 54% of our full-year estimates; attributed mainly to the lower-than-r than expected impairment allowances. Asset quality improved in tandem with lower impairments. We made no revision to CIMB Group’s earnings estimates pending the release of its results next month as generally CIMB Thai’s contribution is minimal (~6%). Maintain our call for the Group at OUTPERFORM as valuations are undemanding. TP of RM6.25 is maintained.

Driven by lower credit charge. YoY, 6M19 CNP of THB430m improved +19% despite poor top-line (-1.5%) and higher operating expenses (+17%) and higher tax of 38% (vs 6M18: 31%). The improvement was driven by impairment allowances falling 31% to THB1,656m with gains of THB172m from NPL sale and operating gains of THB214m contributing to operating income of THB693m (+33%). Fall in NOII (22%) dragged top-line. NII grew 4% despite stellar loans (+18%), dragged by switch to safer but lower yielding assets. Coming under pressure, NIM fell 29bps to 3.5%. The high opex was not unexpected in line with the bank’s transitional expenses, but we believe the high magnitude was due to higher compensation for retiring employees (due to amendment to the Labour Protection Law. As top line falters, CIR rose 11ppt to 70%. Asset quality improved with GIL falling 150bps and credit charge dropping 90bps to 140bps.

QoQ, CNP of THB105m fell 68% dragged by higher opex (+17%) despite decent growth from top-line (+2%) and lower impairment allowances of THB685m (-30%). The moderate top-line was driven by NOII (+8%) to THB548b with NII at THB2,727m (+0.7%). Loans were up 110bps QoQ to +3%. While the switch to safer assets likely saw improved credit charge, NIM came under pressure, falling 30bps to 3.5%. The higher opex saw CIR jumping 9ppt to 74%. QoQ, while asset quality was stable with GIL at 4.3% and credit charge falling by 50 bps to 1.2%.

The shift to safer assets and NPL sale probably helmed in credit charge costs as we had expected higher credit charge due to its preparation for FRS9 in 2020. Thus, we do not discount uptick in credit charge ahead for 2H19. High double-digit loans (coming from a low base) growth was a surprise considering that CIMB Thai is selective on its assets and we do not discount momentum on loans building up driven by high-end consumer (due to the accommodative interest rates) We raised our FY19E earnings ahead by 41% to THB1,121m (from THB790m) based on these assumptions; (i) loans growth of ~9% (from <6%) , (ii) NIM at <4.0% (unchanged), (iii) credit costs at 170bps (from 230bps), (iv) CIR at 63%, and (v) tax rate at ~30% (from 22%).

No changes to our forecasts for the Group, as historically CIMB Thai’s contribution to the Group is minimal (at <7%). To illustrate, FY18 PBT contribution was at 6%. The Group’s 6M19 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 ~6%, (ii) NIM compression at 10bps, and (iii) credit charge of 45bps.

TP maintained at RM6.25 based on an unchanged target PBV of 1.03x implying a 0.5SD-level below its 5-year mean to reflect the on-going challenges and prevailing volatilities. Valuations are undemanding at 0.9x PBV, at the bottom of its 5-year mean. With market looking like its bottoming out, valuations are attractive for the stocks in our banking universe. Adding to the potential returns of >20% and coupled with an attractive dividend yield of 4.2% (with the recent retracement), we reiterate our OUTPERFORM call.

Source: Kenanga Research - 18 Jul 2019