CIMB Niaga’s 1QFY20 CNP of IDR1.1t (+12% YoY) is within consensus expectation. While it was largely an uneventful quarter for CIMB Niaga, asset quality has started to show potential early signs of stress and will likely be the key area of focus for investors ahead. We maintain our earnings estimates pending the Group’s 1QFY20 results later this month. Maintain TP at RM3.65 and MARKET PERFORM call.

Decent start, for now. CIMB Niaga, a 92.5% subsidiary of CIMB Group, reported 1QFY20 core net profit (CNP) of IDR1.1t (+12% YoY), making up 27% of consensus full-year forecast. Nevertheless, we do not discount the possibility that consensus’ estimates may have to be reduced as we expect weaker numbers in the coming quarters – mainly due to rising impaired loans and credit charges.

Strong NOII, partly offset by NIM compression and rising loan impairment allowances. 1QFY20 YoY and QoQ CNP’s growth were mainly underpinned by stronger Non-Interest Income (NOII), which jumped 13% QoQ and YoY. Forex income was strong during the quarter, with both volumes and spreads trending favourably. Elsewhere, loans growth was muted at +3% YoY (flat QoQ) but at just +1% YoY/- 2% QoQ on constant currency terms. YoY and QoQ loans’ growth were led by retail and corporate loans. NIM compressed by an estimated 13- 14bps QoQ and YoY, which management attributed to policy rate cuts in 2HFY19 as well as funding cost pressures from tighter liquidity in the previous quarter. Finally, we note that gross impaired loans ticked up, 18% YoY and 12% QoQ, which we believe was mainly due to chunky corporate accounts. The adoption of IFRS 9 on 1 Jan 2020 resulted in 180bps impact to CET-1 ratio, which remains adequate at 18.1% at end-1Q20.

Watching out for asset quality ahead. Management flagged that from 2Q onwards will be more challenging quarters and the focus will be on asset quality. Already, 6-8% of loans are undergoing restructuring and management estimated CIMB Niaga could end the year with 15-25% of loans being restructured. For restructuring cases related to the Covid- 19 pandemic, the staging of loans will be frozen this year upon successful completion of restructuring. However, post 2020, should the macro environment remain soft and these loans start to slip into arrears, this could impact asset quality. Given the expected surge in restructuring cases, management now thinks that it would be difficult to meet the earlier credit cost guidance of 1.6%-1.8% for this year, and instead, guided for the possibility of a charge off rate of between 1.8% and 2.3% of loans (2019: 1.7%). As for top-line, the challenging macro environment could see loan base remaining flat for the rest of the year while FX volumes have dropped post 1QFY20 (spreads have stayed healthy). With that, the 11-12% guidance for ROE also looks stretched, with a more likely target veering towards single-digit.

Forecasts. We leave our forecasts for CIMB Group unchanged at this juncture. We forecast FY20 group CNP to slip by 27% YoY as loan allowances surge to RM3bn from RM1.6b in 2019, in addition to weaker top-line arising from 15bps NIM compression (policy rate cuts) and softer NOII. CIMB Niaga contributed c.15% to Group pre-tax profit in 2019.

TP maintained at RM3.65 based on a GGM-derived target CY20E PBV of 0.63x. We think this is fair, as revenue and asset quality challenges are mounting in the coming quarters, which should result in cuts to dividends. On balance, our FY20E dividend yield of 5.4% may provide downside support to share price and thus, we retain our MARKET PERFORM call.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 12 May 2020