FY19 results came below expectations on account of higher impairment allowances and opex which eroded a respectable top-line. While we are comfortable with its forward loans guidance we expect a much higher credit charge ahead given the current volatile environment. TP lowered to RM5.60 but OUTPERFORM call maintained as valuations are undemanding.

Within expectation. FY19 CNP of RM4.56b came within our expectation/below market accounting for 97%/93% of respective estimates. However, stripping off divestments gain (2Q19: RM252m), CNP would have accounted at 92% of our estimate thereby below expectation. A final DPS of 12.0 sen brings 2019 DPS of 26.0 sen giving a payout of 51% (above expectation).

Top-line rebounded. YoY, CNP fell 7%; Top-line rebounded 12% to RM17.5b but earnings were dragged by higher opex (+14% to RM9.87b) and impairment allowances (+27% to RM1.98b). Top-line growth was broad-based, led by NOII at +16% to RM3b (coming from trading and forex gains at +34% to RM1.98b). NII gains of +12% were attributed to strong loans at >+6% (as guided) as NIM compressed marginally by 1bps (compression in both Thailand and Malaysia mitigated by improvement in NIM in Indonesia). Domestic loans continued to perform above system at +6%. Cost discipline was unattainable as CIR saw 1ppt uptick to 56% (above guidance) due to Forward23-related expenses. GIL loans saw 17bps uptick to 3.1% but credit charge saw a 3bps uptick to 0.46% (within guidance of 40- 50bps).

Dragged by higher impairment allowances. QoQ, the period under review saw broad-based poor performance. CNP fell 16% to RM849m as top-line fell 2% to RM1.09b (mainly due to the absence of Niaga NPL sale in 3QFY19) with uptick in impairment allowances by +50% to RM606m – this large uptick comprised mainly Niaga’s corporates. Opex fell 11% (due to the absence of the one-staff transformational cost and expected to register RM200m savings per annum and to kick in only in FY21). Loans saw 80bps improvement to +2.1% underpinned by improvement in Consumer and wholesale banking +2.4% and +2.8%, respectively, while NIM remained flat at 2.5% underpinned by the repricing of deposits in 3Q. Due to the higher impairments, credit charge saw a 22bps uptick to 0.68%.

Cautious outlook. Keeping in line with the volatile and uncertain domestic and global outlook, CIMB outlines its targets for FY20E; (i) loans growth at ~6%, (ii) credit costs at 40-50bps, (iii) NIM compression of 5-10bps (inclusive of 2 rate cuts, and (iv) ROE at 9-9.5%. Our assumptions; (i) loans growth at ~6% (from +7%), (ii) credit cost at 50bps (from 40bps), (iii) NIM compression of 10bps (vs 3bps previously, and (iv) ROE of 8.2%.

FY20E Earnings maintained. We maintain our FY20E earningsdespite the revised assumptions. We introduce our FY21E earnings where we expect lower credit charge and compression.

Call maintained but TP lowered. TP lowered to RM5.60 from (RM6.45) subscribing to a lower FY20E target PBV of 0.92 (from 1.06x) implying a 0.5SD below mean. Given the volatilities and uncertainties on both the domestic and global fronts, we feel this is justified. Still, valuations are undemanding; hence, we maintain our OUTPERFORM call.

Key risks to our call are: (i) steeper margin squeeze, (ii) lower-than-expected loans & deposits growth, (iii) higher-than expected rise in credit charge, and (iv) further slowdown in capital market activities

Source: Kenanga Research - 2 Mar 2020