CIMB Niaga’s 1HFY21 CNP of IDR2.17t (+25%) is deemed better-than- expected as NIMs remain supportive with NOII assets yielding better results. Management is cautiously optimistic as asset quality remains an on-going concern, but sees growth opportunities from enhanced digital capabilities. We keep our group-level estimates unchanged for now. Maintain MP and TP of RM4.40.

1HFY21 earnings higher-than-expected. 92.5%-owned CIMB Niaga (Niaga) reported 1HFY21 earnings of IDR2.17t, which is above expectations (63% of consensus estimate) as higher overall income was propelled by better NII and NOII. Typically, Niaga makes up 15-20% of the CIMB Group’s PBT.

YoY, 1HFY21 total income amounted to IDR9.21t (+6%) as NII (+5%) benefited from higher NIMs (5.0%, +16 bps) despite a 7% reduction in total gross loans. CASA-to-deposit ratio gained further to 62.4% (+1.4ppt) to reduce the cost of funds. Meanwhile, NOII (+7%) gained from better fee-based performance and financial assets. Overall, this improved the CIR to 46.3% (-4.3ppt). On the flipside, credit cost rose to 246 bps (+33 bps) on further Covid-19 buffers, as GIL remained elevated at 6.4% (+1.2ppt). Al in, core PATAMI for 1HFY21 came in at IDR2.17t (+25%).

QoQ, 2QFY21 total income dipped slightly (-1%) no thanks to a 4% decline in NOII amidst a stagnant NII during the quarter. NIMs fell slightly to 5.04% (- 4bps), coinciding with the lower CASA mix (62.4%, -0.9ppt). That said, as the group booked lower impairment allowances (-29%) during the quarter, credit cost reduced to 205 bps (-84 bps) which also lifted 2QFY21 core earnings to IDR1.18t (+18%).

Half way through. Having laid the foundations of its digital strategies, Niaga’s management hopes to further tap into underbanked consumers with open banking solutions to widen its product range. Digital channels could also support the bank in keeping CASA growth sustainable. As the vaccination rate in Indonesia progressively increases, the gradual ensuing economic recovery could spill into following quarters. However, management anticipates some easing in earnings to take place as the loans-at-risk mix remains elevated at 18% (albeit still an improvement from 22% in Jun 2020) with peakish GIL being an on-going concern. That being said, we believe management’s credit cost guidance of 240-260 bps should still be on track as overlays are being progressively consumed.

Post Niaga’s results, we leave our earnings forecasts for CIMB unchanged for now, pending group-level earnings report to be released end-Aug 2021.

Maintain MARKET PERFORM and TP of RM4.40. Our TP is based on an unchanged FY22E GGM-derived PBV of 0.70x (1.0SD below 5-year mean). While we see downside risk for the stock as limited for now, it still pales in comparison to its large cap contemporaries in terms of ROE, dividends and asset quality. That said, it could soon reap the rewards of its regional arm’s initiatives for focused approaches, and tap into the restarting of economic activities spurred by vaccinations, which is likely to benefit the larger banks first.

Risks to our call include: (i) higher/lower-than-expected margin, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-expected movement in asset quality, (iv) stronger/weaker capital market activities, (v) favourable/unfavourable currency fluctuations and (vi) changes in OPR.

Source: Kenanga Research - 2 Aug 2021