CIMB Niaga’s 1QFY21 CNP of IDR996b (-6% YoY, +573% QoQ) is deemed better-than-expected on higher NIMs and greater easing of credit cost. Management looks to digitalisation to boost frontline efforts and keeping cost management tight. NIMs could see further upside down the line until re-pricing opportunities are exhausted. We keep our Group-level estimates unchanged for now. Maintain UP and TP of RM3.50.

1QFY21 earnings higher-than-expected. 92.5%-owned CIMB Niaga (Niaga) reported 1QFY21 earnings of DR996b, which is above expectations (32% of consensus estimate) possibly due to greater-than-anticipated NIMs expansion riding on higher CASA mix. Typically, Niaga makes up 15-20% of the CIMB Group’s PBT.

YoY, 1QFY21 total income arrived at IDR4.63t (+9%) as NII (+7%) was lifted by higher NIMs (5.10%, +34 bps) in spite of the 11% decline in total gross loans. This was driven by higher CASA-to-deposit ratio of 63.3% (+3.2ppt) and re- pricing of deposits which lowered the cost of funds. Stronger NOII was also registered from better results in the forex and derivative segments. That said, although CIR too showed improvements at 44.8% (-4.0ppt) with digitalisation and streamlining of branch operations keeping costs stable, Niaga booked high levels of provisions at a credit cost of 289 bps (+135 bps) due to Covid-19 strains on loans. GIL was also higher at 6.3% (vs 4.4% in 1QFY20). This drove 1QFY21 PATAMI to come in weaker at IDR996b (-6%).

QoQ, 1QFY21 total income performed better by 14% mainly due to the abovementioned better NOII results. Still, NIMs did come in higher by 19 bps from a higher CASA mix. Niaga posted lower impairment allowances for the quarter (-27%) with a lower credit cost of 289 bps (-100 bps). Together with the higher top-line, 1QFY21 reported a 573% improvement in net profit.

Briefing’s highlights. Niaga’s management appeared cautiously optimistic with some confidence instilled by the solid QoQ improvements seen. Top- line-wise, management is expecting slight improvement to NIMs from further re-pricing opportunities on its deposits. Loans growth should be held by better retail demand for mortgages and auto financing but headwinds are expected on the SME and Corporate segments if the economy does not pick up meaningfully. While management maintains its credit cost guidance of 240-260 bps for FY21 on normalisation in the later quarters, the continuing rise in GIL could be a cause for concern as some of its R&Rs (18% of total loans) fail to be rehabilitated. For now, digitalisation will be one of Niaga’s leading fronts for higher customer penetration and cross-selling in addition to providing lifestyle value-add services to keep existing customers sticky.

Post Niaga’s results, we leave our earnings of CIMB unchanged for now, pending group-level earnings report expected to be released in May 2021.

Maintain UNDERPERFORM and TP of RM3.50. Our TP is based on an unchanged 0.60x FY22E GGM-derived PBV of 0.61x (1.5SD below 5-year mean). While CIMB is expected to register an EPS growth of 176% in FY21E, we believe this is already priced in, given the impairment shock in 4QFY20. Overall, we are less excited on CIMB as compared to its outperforming peers. Possibly from its less favourable regional exposures, it houses a GIL ratio of 3% whereas its larger cap peers come in at <3%. Upside impairment risks are also deemed greater in our opinion. Additionally, its CET1 ratio and LLC are intact only with the help of write-back of regulatory reserves.

Risks to our call include: (i) better-than-expected NIMs, (ii) higher-than- expected loans growth, (iii) better-than-expected improvement in asset quality, (iv) stronger capital market activities, and (v) favourable currency fluctuations.

Source: Kenanga Research - 30 Apr 2021