CIMB Niaga’s 6M19 CNP of IDR1.97t is within market expectation, accounting for 55% of consensus estimate as both top-line and asset quality improved. We refrain from making any changes in earnings estimates pending the Group’s 6M19 results later this month. Maintain TP at RM6.45 with an OUTPERFORM as valuations are undemanding.

Within expectations. CIMB Niaga, a 92.5% subsidiary of CIMB Group recorded a core net profit (CNP) of IDR1.97t for 6M19 which was in line with market expectation, accounting for 55% of full-year estimate. CNP growth of +12% YoY was primarily driven by improvement in top-line, mainly from fee-based income.

NIM expanded with asset quality improving. Top-line was up by +12% to IDR9.4t, driven by NOII (+30% to IDR3.1t). NOII growth was driven primarily by strong performance from realised gain on derivatives (>+100% to IDR960b) and gains from sale of financial assets (>+100% to IDR155b). NII was commendable, registering mid-single-digit growth (+5.5% to IDR 6.32t) for the first time since 3Q17. NII was driven by strong NIM (+30bps to 5.2%; above guidance) as loans moderated to 40bps to +2.6%). Asset quality continued to improve with GIL down by 32bps to 2.9% with credit charge shedding 7bps to 1.7% (within guidance of 1.8%).

QoQ, the strong 1H was also driven by a strong 2Q as CNP was up 10% (a first since 1Q18) to IDR1,035b. While NII was strong for the quarter (+8%), NOII fell 12% to IDR1.44t. Loans rebounded by +1.4% with the strong NII supported by expanding NIM (+35bps to 5.4%). Asset quality was mixed with GIL improving by 18bps to 2.9% with a 19bps uptick in credit charge to 1.8%.

Consumer the driver. The NIM expansion wasn’t a surprise given that 1Q saw uptick due to better repricing of assets. Management guided that further expansion is unlikely as higher funding costs are likely to creep in (which we believe could be due to higher deposits intake (as LDR is at >100% vs. 98% a year ago). Thus, we expect NIM to hover at ~5% by end of FY19. We are encouraged by improvement from its consumer banking (+7% YoY and contributing 40% of its loans) underpinned by its mortgages (+14% YoY) and credit card (+10% YoY) space. With its auto loans turning around since 2Q19, we expect Niaga’s loans to be driven by the mass affluent segment with risk appetite sustainable given the improving asset quality.

Forecasts unchanged for the Group as Niaga’s results came within expectations and guidance. Historically Niaga’s contribution to the Group is at ~20%. FY18 PBT contribution was at 20%. The Group’s 6M19 results are expected at the end of the month; thus FY19E earnings of RM4.7b are maintained for now.

TP maintained at RM6.45 based on a FY20 target PBV of 1.06x (5- year mean). This is justified as we have been conservative in our assumptions coupled with momentum from capital market activities and loans activities expected to gain traction from both Malaysia and Indonesia into 2020. Furthermore, the low interest rate environment will be supportive of loans from the consumer space. Valuations are undemanding with potential returns >30% and coupled with a decent dividend yield of 4.4%, we reiterate our OUTPERFORM call.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-thanexpected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 30 Aug 2019