9MFY19 results were above expectations with CNP accounting for 84%/82% of our/market estimates. The Group’s top-line is gaining traction thanks to resilient loans and capital market activities. TP maintain at RM6.45 and we reiterate our OUTPERFORM call as valuations remain undemanding.

Above Expectations. 3Q19 net of RM1.01b (-33% QoQ, -14% YoY) brings 9M19 to RM3.7b (-17% YoY). At the core level 3Q19 CNP of RM1.27b (-16% QoQ, +8% YoY), brings 9M19 to RM3.969b (+12% YoY) which is 84%/82%.

Improvement led by Islamic Banking and fee-based income. YoY, top-line revenue of RM13,021m was led by growth in Islamic Banking and NOII at +18% and +8%, respectively, as NII rebounded 3% to RM7,406m. CIMB’s Islamic first initiative in both Malaysia and Indonesia is driving fund-based income where its financing grew 9% to RM90b (25% of gross loans). Islamic financing is being driven by both the mortgage and auto segments. Improved NOII was underpinned by trading and forex income (+34%) to RM1,584m. Operating profit of RM4,614m improved slightly by 80bps to +1% as opex continued to expand (due to Forward23 initiatives and RM349m staff Transformational Initiatives in 3Q) but mitigated by impairment allowances which fell 10% to RM1,032m (mainly from writebacks). NP was down by 17% but stripping of the RM928m gains (9M18) and adding the RM258m transformational costs gains (3Q19, net of tax), up by +12%. Stripping of this one-off transformation cost, CIR would have been at 54%. Malaysia’s PBT contribution remains resolute at 66%, followed by Indonesia at 19%, Singapore at 7% and Thailand at 5%. Group’s loans growth of 5.9% was within expectation/guidance of ~6% with domestic loans (+4.5%) above systems (+3.9%) followed by Indonesia (+5%) and Thailand (+9%). NIM compression was as expected at 5bps. Asset quality saw slight deterioration (8bps) to 3.15% but credit charge was down 39bps due to the above-mentioned writebacks (vs. guidance of 40-50bps/estimation of 45bps).

Top-line traction. QoQ, top-line continued its traction (+10%), with both Islamic banking and NOII improving further by 269bps and 83bps, respectively, at +10 and +13%. NP down by 33% but stripping of the transformational costs CNP would have been at 1,268m (-16% QoQ). The one-off staff transformational costs are expected to register RM200m savings per annum. Loans moderated by 20bps to +1.3%, but consumer loans were resilient led by as Housing (+2.2%), HP (+2.9%) and PF (+5.3%). Overall, consumer loans improved by 3% and contributed 50% of total loans. NIM improved by 11bps (by our estimation) as cost of funds fell (28bps) due to repricing of funds after the recent OPR cut. CASA remained resilient at 35%. Impairment on allowances for loans saw a 23ppt uptick translating to a credit costs of 46bps (as guided and expected to be normalised around this level).

Consumer loans the driver. As guided previously, management maintained its FY19E guidance as follows: (i) loans at 6%, (ii) credit costs at 40-50bps, (iii) NIM compression of 5-10bps, and (iv) ROE at 9- 9.5%. Loans have been slowly gaining traction led by the consumer space, thanks to the Group’s strategy to target the mass affluent segment in the region as accommodative interest rate prevails. Given that asset quality remains resilient with current interest rate regime prevailing, we expect the Group to aggressively foray into this segment. Given that NIM will still be under pressure ahead, we believe pressure will be minimised by its resilient CASA and further easing of expensive deposits.

Revised earnings. We revised our FY19E/FY20E earnings by 0.5%/2% to RM4,702m/RM4,895m on account of the cost-savings. No change in call and 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. Loans activities are picking up, mitigating the moderation in business loans coupled with a resilient capital market. With valuations undemanding coupled with a decent dividend yield of 4.2%, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 25 Nov 2019