CIMB Thai’s 9MFY19 earnings improved +35% YoY on account of lower than expected impairment allowances. Loans growth was as expected (at +9%). YoY, 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 (~5%). Maintain our call for the Group at OUTPERFORM as valuations are undemanding coupled with a decent dividend yield of 4.5%. TP of RM6.45 is maintained.

Better asset quality as loans improved. YoY, 9MFY19 CNP of THB728m improved 35% on account of lower-than-expected impairment allowances despite a decline in NOII. Pre-provisioning Operating Profit was a letdown at THB2,671m (-29%) due to uptick in operating expenses (+19%) vs. marginal increase in total income to THB9,815m (0.4%). Surging expenses was not unexpected due to: i) higher personnel cost (attributed to Labour Laws which required higher compensation for longer serving employees), and ii) further expenses incurred for the Bank’s Fast Expansion Strategy. The marginal top-line growth was dragged by decline in NOII (-11%) as NII moderated (130bps) to +3%. NOII was dragged by higher losses in financial liabilities. On a positive note, loans improved 9% but NII was dragged by NIM compression (reported; 50bps) as lending yield faltered due to the interest rate cut in August 2019. Asset quality continues to improve YoY as GIL fell 110bps to 4.6% with credit charge falling 83bps to 1.24% (vs. expectation of 1.7%) due to a shift to safer assets and NPL sale.

QoQ, CNP of THB298m registered 184% improvement attributed to a lower tax rate of only 4% as top-line moderated by 30bps to 1.6%. While NII was marginally higher (+1%), NOII moderated by 3ppt to 5%. The marginal NII was dragged by flattish NIM as loans moderated by 140bps to 1.4%. Moderation in NIM was dragged by further losses in financial liabilities (-40%) but offset by gains in: i) fee & service income (+21%), and ii) trading & forex (+31%). Operating profit fell 20% to THB 125m dragged by higher opex (+7%) and offset by lower impairment allowances (-15%) to THB584m. Despite uptick in GIL by 30bps to 4.6%, credit charge (3Q19: 97bps) has been trending down (1Q19: 171bps) which we attributed to better asset selection and NPL sale in 2QFY19.

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 in 4Q19. While loans seemed to be on a downtrend in 3Q, we will not be surprised of uptick in loans in 4Q driven by high-end consumer (due to the accommodative interest rates). We maintained our FY19E earnings ahead at THB1,121m based on these unchanged assumptions; (i) loans growth of ~9% , (ii) NIM at <4.0% , (iii) credit costs at 170bps , and (iv) CIR at 63%.

No changes to our forecasts for the Group, as historically CIMB Thai’s contribution to the Group is minimal (at <7%). To illustrate, 1HFY19 PBT contribution was at 5%. The Group’s 9MY19 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, (iii) credit charge of 45bps, and (iv) ROE of 8.7%. Coming from a low base, we pencilled in a 6% growth in NOII but expect a contribution of 25% to the top-line.

TP maintained at RM6.45 based on an unchanged target PBV of 1.06x implying a 5-year mean. With valuations undemanding coupled with a decent dividend yield of 4.5%, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 23 Oct 2019