Regional universal bank CIMB Group (CIMB) reported an adjusted net profit of RM1.27bn, 8% higher year on year, for the third quarter of the financial year 2019 (3QFY19). Macquarie Equities Research (MQ Research) released a report (22 Nov) on this, reiterating CIMB as its top pick among the large cap Malaysian banks, in line with its preference for corporate banks.

Event

• CIMB reported 3QFY19 adjusted (Adj) net profit (NP) of RM1.27bn, (+8% year on year (y/y), -16% quarter on quarter (q/q) excluding RM258m of one-off costs). This brings 9M19 Adj NP to RM3.97bn, 84%/82% of MQ Research’s/street expectations. Annualised return on equity (ROE) was 9.7% (FY18: 9.6%, adj.), running ahead of management’s target of 9.0%-9.5%. No 3Q dividend was declared (or expected); MQ Research’s FY19E dividend forecast is 28 sen or a 56% payout (FY18: 25 sen, 51% payout).
• Key takeaways: A key concern surrounding CIMB’s results did not materialise: while sequentially higher q/q, 3Q19 loan loss charge (LLC) at 45bps remains well within guidance (40-45bps), with 9M19 LLC at 38bps (51bps if MFRS9 writebacks are excluded). At the same time, gross loans grew by a healthy +5.6% y/y, +1.3% q/q. (sector loan growth: +3.8%). Furthermore, net interest margin (NIM) rebounded +16bps to 253bps vs 2Q19. 9M19 NIM is still down about 5bps lower y/y; management continues to guide for a 5-10bps y/y decline for FY19 from the overnight policy rate (OPR) hit.
• Non-interest income (NOII) saw sequential slowdown, -5.4% q/q vs the robust trading income-driven 2Q19; nonetheless +22% y/y. Excluding the one-off charges, operating expenses rose +10.1% y/y in 9M19, albeit driven by foreign exchange differences from overseas operations (core operating expense rose +8% y/y). As a result, cost to income (CIR) rose to 52.6bps (2Q19: 51.3bps), tracking marginally below MQ Research’s expectations (52.9bps). Common equity tier 1 (CET1) ratios broke above management’s 13% target, now at 13.1% for 9M19; potential for dividend upside.

Impact

• Operating highlights: Malaysian loan growth of +4.5% y/y was above industry, driven by mortgages (+8.3% y/y). More importantly, mgmt. indicates that the growth did not come at the cost of margins – a claim backed by the sequential NIM recovery. Management indicated that repayment of low-yield corporate loans lent a tailwind to overall loan yields. Of course, it certainly helped to allow loan-to-deposit ratios to rise 10bps to 91.6% (industry: 88.5%); liquidity coverage ratio maintained above 100% for all banks. CIMB Niaga’s NIMs should remain pressured due to stiff competition + tight liquidity.
• TnG traction: Already taking the crown as the most widely used e-wallet, CIMB’s 51%-controlled Touch ‘n Go eWallet (49% controlled by Alipay’s Ant Financial) continues to demonstrate solid traction, with +20% q/q growth in registered users to 5.4mil. More importantly, Monthly Active Users is at a healthy 30%-35% range. Cash burn on marketing costs likely to persist till at least end-2020 before the venture has sufficient scale for management to focus on monetisation; potentially a digital bank play.

Action and Recommendation

• Reiterate CIMB as MQ Research’s top pick among the large cap Malaysian banks with +20% total shareholder return (TSR), in line with MQ Research’s preference for corporate banks. A key catalyst for MQ Research’s thesis – the rollback of dividend reinvestment plan (DRP) – is looking more likely in 4Q19, with 9M19 CET1 now at 13.1%. With management indicating loan growth may fall behind their 6% target for FY19 (9M19: +5.6% y/y), there is potential for more dividend upside; barring an upgraded growth outlook in FY20.
• While higher investment costs are expected to keep the CIR ratio elevated through FY20, some cost savings from the five-year Forward 23 plan will begin to materialise next year – RM200m/annum in savings from layoffs (18-month payback vs the one-off retrenchment costs).

12-month Target Price Methodology

• CIMB MK: RM6.15 based on a Price to Book methodology

Source: Macquarie Research - 26 Nov 2019