CIMB Thai’s FY19 earnings improved >+100% YoY on account of lower impairment allowances. Fee-based income saw a stellar conclusion (+16%) on account of NPL sale while loans moderated slightly YoY on account of weak 4Q. We estimate that PBT contribution to the Group will be at ~7% (1HFY19: +5%). We made no revision to CIMB Group’s earnings estimates pending the release of its results next month as generally CIMB Thai’s PBT contribution is minimal (6-7%). Maintain our call for the Group at OUTPERFORM as valuations are undemanding coupled with a decent dividend yield of 4.4%. TP of RM6.45 is maintained.

YoY, FY19 CNP of THB1,501m improved >100% (12MFY18: THB6.9m) on account of lower impairment allowances of THB2,521m (- 49%). Pre-provisioning Operating Profit (PPOP) was a letdown at THB3,953m as opex saw an uptick (+14%) vs. increase in total income to THB13,643m (+5%) – its best performance in the last six financial years. As highlighted before, surging expenses was due to: (i) higher personnel cost, and (ii) further expenses incurred for the Bank’s Fast Expansion Strategy. Top-line uptick was supported by better NOII (+16%) to THB2,736m but mitigated by higher losses on financial liabilities (THB2,803m vs. FY18: THB760m). Loans improved 7% but NII (+2%) was mitigated by margin pressure of 33bps to 3.4% due to higher cost of funds as deposits improved 320bps to 7.5%. Asset quality was mixed as Gross Impaired Loans saw 30bps uptick to 4.6% arising from certain corporate accounts and the retail segment but credit costs fell 122bps to 1.03% due to shift to safer assets and NPL sale (THB399m vs. 12MFY19 THB226m).

QoQ, the reporting quarter saw its strongest ever in the last six financial years with CNP surging >100% to THB773m. While top-line surged 15% to THB3828m, the stellar earnings were abetted by lower impairment allowances (-22%) of THB454m. The surging NOII (+92%) of THB1105m was supported by lower losses on financial liabilities (- 97%) to THB31m coupled with gains on NPL sale of THB399m. NII fell by 1% as loans were marginal (<1%) with margin pressured by 5bps to 3.4%. Asset quality was stable at 4.6% with credit charge falling 50bps to 0.5% on account of lower impairments.

The shift to safer assets and NPL sale helmed in credit charge costs but we would not be surprised of an uptick in credit charge for FY2020 as FRS9 kicks in 2020. The slightly moderate loans (FY18: +7.6%) were disappointing as we had expected better performance on account of accommodative interest rates and high-end consumer spending. However, given the low rate interest rate environment, we expect margin pressure to likely remain in 2020 as CIMB Thai ramps up its growth which will see deposit competition intensifying. Given that improvement in NOII was due to NPL sale and lower losses on financial liabilities, we are inclined to believe its NOII are unlikely to repeat its FY19 performance (Historically in the last 12 quarters, NOII averaged THB~640m). Given that earnings will be under pressure from margin compression and soft fee-based income, we expect CIMB Thai’s PBT contribution ahead to the Group will still hover around ~7%.

We refrain from making changes to our forecasts for the Group, as historically CIMB Thai’s contribution to the Group is minimal (at <7%). To illustrate, 9MFY19 PBT contribution was at 5% and we estimated the contribution to be ~7% for FY19. The Group will likely benefit from the corporate push in 2HCY20 from both Indonesia and Malaysia with Niaga’s PBT contribution to the Group likely to push ahead of Thailand’s. The Group’s FY19 results are expected at the end of next month, thus FY19E earnings of RM4.7b are maintained for now.

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 4.4%, we reiterate our OUTPERFORM call

Source: Kenanga Research - 22 Jan 2020