INVESTMENT HIGHLIGHTS

• Net loss due to higher than expected provisions.

• However, PPOP saw robust growth with solid NII growth.

• CI ratio improved on higher income.

• Rights issue proposed to strengthen capital position.

• No change to our forecast for now.

• Valuation remains attractive. Maintain BUY with unchanged TP of RM5.90 pegging the stock to 1.1X Price-to-Book multiple.

Net loss on unexpected higher provision. We were surprised by CIMB Thai posting net loss of -THB629.5m for FY16. Comparatively net profit for FY15 was THB1,052m. The net loss was attributed to higher than expected provisions where it grew +66.6%yoy to THB6.28b. Bulk of the provisions came in 4QFY16 at THB2.9b vs. THB844.6m and THB875.1m posted in 3QFY16 and 3QFY15 respectively.

Higher provisions due to rice industry. The higher provisions were due to rising NPLs in certain industries during the year as well as those arising from the gradual pace of the economic recovery. We understand that this was from the agricultural segment more specifically from the rice sub-segment. Nevertheless, all Thai banks were affected by the rice industry. Also, we understand that bulk of the impairments was provided in FY16 and we do not expect to see the same level in FY17.

Resulting in higher gross NPL ratio. The gross NPL ratio was 6.1% vs. 3.1% as at 31 December 2015, due to slower repayment ability from borrowers in certain sizable corporate accounts.

Nevertheless, operations were robust. PPOP grew a robust +7.8%yoy to THB5.50b on faster pace growth in income vs. OPEX. Total income grew +5.7%yoy to THB12.9b due to NII growth, which increased +16.4%yoy to THB9.87b. NII growth was from a decrease in interest expenses by -21.8%yoy. Hence, NIM came in higher by +50bps yoy to 3.77% in 2016, as a result of more efficient funding cost management. Meanwhile, NOII decreased -18.5%yoy to THB3.06b due to lower other operating income, which fell -37.7%yoy to THB862.6m, mainly from lower treasury activity.

CI ratio improved due to increased income and despite higher OPEX. For FY16, OPEX increased +4.2%yoy from higher other expenses but this was partially offset by lower premises and equipment expenses. Despite this, CI ratio improved to 57.4% compared to 58.3% in FY15 as a result of better cost management and increased income.

Stable loans and deposit growth. Total gross loans stood at THB206.4b, an increase of +3.7%yoy. On the other hand, deposits increased of +2.4%yoy to THB223.5b. As a result Modified LD ratio was higher at 92.4% compare to 91.2% as at 31 December 2015.

Proposing rights issue to strengthen capital. CIMB Thai Bank proposes a rights issue to reinforce its capital position and balance sheet to support business growth. It plans to raise up to THB5.505b capital via Rights Offering, issuing 5,505,495,928 of new ordinary shares priced at THB1.00 per share. The Rights Offering will be issued at a ratio of 2 Rights Shares for every 9 existing CIMB Thai shares.

Surprised by the proposed rights issue. We are perplex by the rights issue as CIMB Thai’s Tier 1 capital ratio stood at respectable 10.7% as at 31 December 2016. However, we believe that this is in preparation of FRS 9. We estimate that CIMB Bank will have to pay RM649.6m to fully subscribe to its 93.7% portion of the rights issue. We do not believe that this will a problem for CIMB Bank as its cash balance stood at RM30.0b as at 30 September 2016. We believe there is no impact to the group's overall balance sheet or capital. Improvement will come at CIMB Thai's level.

Minimal impact to the Group's result. We were surprised by the CIMB Thai result as we did not expect provisions to be at this elevated level. Recall, for 9MFY16, CIMB Thai was 4th largest earnings contributor in terms of the Group’s PBT at 4% and 3rd largest contributor in terms of loans book at 9.1%. For FY16, CIMB Thai will be a negative contributor to the Group. However, based on exchange rate of THB1:RM0.1255, we estimate that the negative contribution to the Group’s FY16 net profit is approximately -RM74.3m. Putting into context, the Groups net profit for 9MFY16 was RM2.71b. Therefore, impact will be minimal.

FORECAST

We make no changes to our forecast pending FY16 result for the Group, expected next month.

VALUATION AND RECOMMENDATION

We believe that the Group’s business franchise is still sound in Thailand as evident by the strong operational performance, especially on NII growth. Asset quality is our only concern but we understand that the management are actively rectifying the situation and that provisions is expected to be less in FY17. While the FY16 result for CIMB Thai was disappointing, we believe that prospect for the Group remains solid, with recovery in Indonesia and steady growth in Malaysia to be the main driver. Hence, we continue to be cautiously optimistic on the prospect of the Group. We maintain our BUY recommendation. Our unchanged TP of RM5.90 is based on PB multiple to 1.1x which is 1 standard deviation below its 5-year historical PBV.

Source: MIDF Research - 23 Jan 2017