We expect the coming 9MFY19 results to be positive and within expectations although top-line will likely be under pressure due to slower loans as repayments outpace disbursements. Improvement in NIM and credit charge expected QoQ, with asset quality still resilient. Reiterate OUTPERFORM with an unchanged TP of RM6.45.

Slower loans but sequentially picking up. We believe top-line will be driven by Islamic financing and fee-based income, but expect fund based income to be moderate, primarily due to moderate loans while corporate loans repayments are seen to be outpacing disbursements. Overall loans are seeing improvements sequentially. The group is seeing momentum in both the consumer and SME space. Domestic loans are seeing uptick in both the mortgages and auto space (1HFY19: +11% YoY and +12% YoY respectively) – hence expected improvement in Islamic income as CIMB is adopting an Islamic first approach with Islamic financing driven by consumer in the auto and mortgages segment. CIMB Niaga is seeing momentum picking up in both YoY and QoQ coming from its own corporates and SME space. Uptick in housing loans is seen coming from both the primary and secondary markets. While YoY loans will improve, YTD performance will be slightly below the Group 6-7% target as corporates withhold spending. We do not rule pick-up in the remaining months of 2019 but currently, CIMB has revised their loans expectation by 100bps to 5-6% (in line with our expectation of ~+6% for 2019). QoQ, NOII is picking up with both Bancassurance and Wealth Management gaining momentum. Trading and FX incomes are showing decent improvement and are expected to be better from Q2.

No change in NIM guidance of 5-10bps compression for the Group but we expect improvement in NIM QoQ due to the re-pricing of funds after the May 2019 OPR cut. Despite three rate cuts in Indonesia, management maintained its 5.3-5.4% NIM (as deposits are priced immediately) guidance but might face downside pressure due to both funding and asset competition. On a positive note, rate cut for Indonesia is neutral to margins at Group level. Overall on a YoY basis, NIM for Niaga is seen improving.

No change of its guidance of 40-50bps in credit costs for FY19 and we do not expect higher impairment allowances in 3Q due to the absence of further provisioning of an individual account as seen in 2Q (2Q impairments: RM329m vs. RM300m in 1Q). There will be a slight uptick in Niaga’s impairments allowances in 3Q but overall credit charge will be within guidance (150-200bps vs 1HFY19: 180bps). At the balance sheet level, Group’s asset quality is still resilient although management guided for caution on the commercial space in the coming 12 months but management emphasised there are no significant deterioration in overall asset quality and no significant movements in its loan loss provisions. Management is also looking for further NPL sale ahead but guided for none in 3Q. Overall, the Group’s credit charge guidance is maintained but we expect 9MFY19 to be lower than target (due to write-backs in 1HFY19).

Earnings maintained We made no changes to our FY19E/FY2E earnings of RM4.7b/RM4.8b, based on these unchanged assumptions; (i) loans at +6%/+7%, (ii) credit charge at 45/39 bps, and iii) NIM compression at 10bps/7bps with ROE for FY19 expected at ~9% (vs. management’s guidance of 9–9.5%).

No change in TP and call. TP maintained at RM6.45 based on a FY20E target PBV of 1.06x (5-year mean). We feel this is justified as we have been conservative in our assumptions. Given the resilient asset quality and undemanding valuations coupled with a decent dividend yield of 4.5%, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 25 Oct 2019