In a Macquarie Equities Research (MQ Research) report released today, CIMB Niaga, a 92.5%-owned Indonesian subsidiary of CIMB Group Holdings (CIMB), reported a 19% fall in year-to-date net profits and return on equity of 7.7% on higher provisions. MQ research sees CIMB as a recovery play and maintains its target price at RM4.50.

Event

• Indonesian banks published their monthly financial data for July. CIMB Niaga (a 92.5% subsidiary of CIMB that contributed 63% of 2Q20 profit before tax (PBT)) reported a -19% decline in year-to-date (YTD) net profits and return on equity (ROE) of 7.7% on higher provisions.

Impact

• Falling net interest margin (NIM) and decelerating loan growth drove net interest income (NII) down -3% y/y. Non-interest income (NoII) also saw a drastic swing into -ve territory, -RP463bn for the month. Operating expenses (Opex) discipline (+0% y/y) could not offset the drop in revenues, resulting in -21% year-on-year (y/y) in pre-provisioning operating profit. Provisioning decelerated month-on-month (m/m) July to RP479bn (June: RP559bn), still elevated vs historic levels and bringing net credit costs to 230bps YTD, the highest level since 2016. Overall, the challenging operating environment drove ROE to 7.7% YTD July. Notably, Niaga remains highly liquid on robust current accounts and savings accounts (CASA) growth vs deliberate selective deceleration in loan growth, particularly in commercial banking. The NoII swing aside, the trajectory is broadly within expectations.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM4.50 based on a Price to Book methodology.

• Catalyst: 3Q20 results, peak provision guidance.

Action and Recommendation

MQ Research maintains CIMB as their preferred big cap Malaysian bank (RHB [RHBBANK MK, RM4.69, Outperform, TP: RM6.20] is overall top sector pick) on depressed valuations and -ve expectations well priced in. While earnings will remain under pressure through FY20, MQ Research sees CIMB as a recovery play.

12-month Target Price Methodology

• CIMB MK: RM4.50 based on a Price to Book methodology
• RHBBANK MK: RM6.20 based on a Price to Book methodology

Source: Macquarie Research - 9 Sept 2020