We expect its upcoming FY19 results to be positive and within expectations, driven by loans with NIM and credit charge looking as guided. NIM are expected on the lower end of its 5-10bps compression guidance with asset quality looking stable and credit charge slightly lower than its mid-point guidance of 40-50bps. The Group saw corporate draw-downs in 4QFY19, expecting it to pick up in 2HCY20 driven by the expected fiscal push. Valuations are undemanding and the Group will benefit from the fiscal push in 2HCY20; thus, we reiterate OUTPERFORM and unchanged TP of RM6.45.

Loans on target. We expect the Group to achieve its loans target of ~+6% for FY2019; primarily driven by consumer. For 4QCY19, we expect some slight pick-up in corporate loans as the Group saw some draw-downs in corporate activities at end of 2019. CIMB Niaga will see pick-up in both consumer and corporate in 4QCY10 but unlikely to see pick-up from the SMME side (Small Medium & Micro Finance). Note that Corporate and Consumer contributed 27% and 37% to Niaga loans portfolio, respectively, in 3QFY19 (9MFY19: Consumer and Corporate grew at +8% YoY each). We expect domestic loans to see uptick in both the mortgages and auto spaces (9MFY19: +11.6% YoY and +12.4% YoY, respectively) – hence, expected improvement in Islamic income seen as CIMB is adopting an Islamic first approach with Islamic financing driven by consumer in the auto and mortgages segment. Overall outlook for the Group loans for 2020 is generally expected to be moderate but we expect a pick-up in 2HCY20 especially from the corporate/commercial side.

NOII resilient. Management guided for a slightly lower NOII (after stripping the RM100m gain in NPL sale in Niaga and RM80m in reclassification of other provisions – gains from foreclosed assets - in 3QFY19) but it should account for 95-98% of our full-year estimate of RM4.37b. Treasury activities are doing well with December being a good month but fee income activities was flat and likely to be fairly stable in 4QFY19. Management is fairly confident that fee-based activities will stay resilient in 2020, bolstered by MTM gains on an expected rate cut in 1QCY20.

NIM likely on the lower end of guidance. We do not expect any significant change in the Group’s guidance of 5-10bps NIM compression but it is likely to stay slightly above the lower end of this range. Domestic NIM are doing well and expecting to trickle up due to lingering effects of the re-pricing of deposits in 3QFY19. No significant ramp-up of deposits in 4QCY19 expected as liquidity in the banking system is still ample coupled with moderate outlook in loans growth. Niaga saw slight NIM compression in 4QCY19 but we expect NIM to stay above the 5% level. While deposit competition is looking stable in both Malaysia and Indonesia, management guided for an increasing funding pressure for CIMB Thailand as it ramps up growth in 2020. Management guided for a 3-4bps compression in NIM for FY2020 (or RM200m loss) on the impending rate cut.

Earnings maintained We made no changes to our FY19E/FY2E earnings of RM4.7b/RM4.9b, based on these unchanged assumptions; (i) loans growth at +6%/+7%, (ii) credit charge at 43/40 bps, and (iii) NIM compression at 5bps/3bps with ROE for FY19 expected at ~9% (vs. management’s guidance of 9–9.5%).

No change in TP and call. TP is maintained at RM6.45 based on a FY20E target PBV of 1.06x (5-year mean) which is justified as we have been too conservative. The Group will likely benefit from the corporate push in 2HCY20. While dividend yields are soft, we understand that the Group might reduce its electable portion in the DRS, freeing more cash to investors. Given the resilient asset quality and undemanding valuations coupled with decent dividend yield of 4.4%, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 21 Jan 2020