CIMB: Kenanga Research raised TP to RM6.25 and upgrade to OUTPERFORM (Source: Kenanga Research)

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Publish date: Thu, 30 May 2019, 10:53 AM

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3M19 results were in line accounting for 25% of our core earnings estimate. No change to our earnings but we raised TP to RM6.25 as we roll-over to FY20E. Valuations are undemanding, raised to OUTPERFORM.

In Line. CIMB recorded a 3M19 CNP of RM1.19b, accounting for 25%/24% of our/market estimates. No dividend declared as expected.

Excellent loans growth while overall asset quality improving. YoY, 3M19 CNP fell, (-9%) to RM1,192m due to the absence of RM152m gains recorded in 1Q18 (disposal of China Galaxy). Stripping of these gains, CNP would register a +3% upside. Topline was flat dragged falling NOII (-14%) to RM980m. Operating profit fell 2%, dragged by opex (+8%) as incremental investment kicks in towards their Forward23 Transformation Programme. The absence of divestment gains saw weaker PBT (-8%) to RM1,603m. PBT contribution from Malaysia fell 29% YoY on account of lower fee income, but Indonesia and Thailand improved at +47% and 62% respectively driven by lower provisions. Malaysia remains the largest PBT contributor at 55% followed by Indonesia and Thailand at 24% and 10% respectively. (FY18: at 64%, 20% and 6% respectively). CIR was way above target (~50%) due to incremental costs mentioned above. Group loans growth of +8% exceeded expectations/guidance 6.6%/6-7% with domestic loans growing above systems (+7.7% vs +4.9%) with mortgages and working capital the driver at +9% and +10%, respectively. NIM (-3bps) fell (below guidance due to its base rate hike in Nov) mainly pressure from Malaysia, but management maintained its 5-10bps compression for FY19. On a positive note, asset quality improved with GIL falling 23bps to 3.0% and credit charge fell 14bps to 0.35% (vs guidance and estimation of 40-50bps) due to better recoveries in Indonesia and Thailand.

A better quarter benefiting from higher asset pricing. QoQ, saw better traction as CNP rebounded at +7%, on account of better topline (+2%) and non-operating gains of RM16m. Loans moderated (-40bps) to +1.3% (Q1 generally a weak quarter) as demand for working capital moderated (<1%). NIM saw a 3bps uptick on better asset pricing. Asset quality was mixed with a 9bps uptick in GIL, but credit charge remained flat.

Still cautious, management maintained its guidance for FY19E i) loans at 6-7%, ii) credit costs at 40-50bps, iii) NIM compression of 5-10bps, and iv) ROE at 9-9.5%. Downside pressures are expected to prevail from both Malaysia and Indonesia while lower recoveries are expected ahead hence maintaining its credit costs guidance. Our assumptions for FY19E; i) loans growth at ~6%, ii) credit cost at 45bps, iii) NIM compression of 10bps, and iv) ROE of 8.7%. Coming from a low base, we pencilled in a 6% growth in NOII but expect a contribution of 25% to the top-line.

Maintained earnings. As results are in line, we maintain our FY19E/FY20E earnings at RM4.7b/RM4.6b.

Raised TP and call. We raised our TP to RM6.25 (from RM6.10) as we roll-over to FY20E ascribing a target PBV of 1.03x implying a 0.5SDlevel below its 5-year mean to reflect the on-going risks and challenges ahead. Valuations are undemanding coupled with a decent dividend yield of 4.4% giving a total upside >25, upgrade to OUTPERFORM.

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

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