INVESTMENT HIGHLIGHTS

• Normalised earnings within expectations

• Lower provisions and OPEX moderated the impact of income contraction

• Income contracted due to NIM compression in Indonesia and market conditions in 2QFY18

• Good traction in gross loans growth

• Dividend of 13 sen

• Maintaining forecasts

• Maintain BUY with unchanged TP of RM7.85

Normalised earnings within expectations. The Group 1HFY18 normalised earnings was within expectations and coming in at 47.3% and 52.1% of ours and consensus’ full year estimates respectively. The normalised net profit excluded the CPAM & CPIAM gain of RM928m but included the CSI gain of RM163m.

Lower provisions offset income weakness. Normalised 1HFY18 net profit grew +3.3%yoy despite net income declining -5.2%yoy. The income pressure was alleviated by lower loan provisions which fell -29.4%yoy to RM746m. This was due to improvement from consumer (-53.0%yoy to RM261m) and commercial segment (- 34.4%yoy to RM181m). Asset quality was also stable with GIL ratio remaining unchanged from 2QFY17 and 1QFY18 at 3.2%.

As did lower OPEX. OPEX fell for the second consecutive quarter where 2QFY18 OPEX declined -2.5%yoy (vs. -6.8%yoy in 1QFY18). This resulted in 1HFY18 OPEX contracting -7.3%yoy as personnel, establishment, marketing and admin & general expenses declined by -7.0%yoy, -11.9%yoy, -10.1%yoy and -0.4%yoy to RM2.42b, RM974m, RM134m and RM698m respectively. OPEX reduction was due to deconsolidation of CIMB Security International and forex impact. However, excluding forex, OPEX would have fallen -3.0%yoy which we opine showed the positive effect from the management cost management initiatives.

Income weakness from many angles… There were several factors that affected income in 1HFY18. These are:-

(1) NII declined -4.8%yoy due to NIM contraction in Indonesia where it fell by -78bps(yoy) to 5.09%. This resulted in Group 1HFY18 NIM to decline by -19bps(yoy).

(2) NII decline was also due to softer commercial and wholesale banking.

(3) NOII decline of -6.1%yoy due to slower capital market activity especially from GE14 impact in Malaysia.

…but could potentially moderate in 2HFY18. Nevertheless, we believe that income weakness could potentially moderate in 2HFY18 as capital market acitivity picked up in 3QFY18. While NIM may continue to be under pressure, the management does not expect NIM to compress further and may be maintained cira 2.45% to 2.5% level. Coupled with continuing gross loans growth, we expect NII in 2HFY18 to recover and moderate the decline in 1HFY18.

Good traction in group gross loans growth. Group gross loans as at 2QFY18 grew by +3.4%yoy to RM329.9b driven by the consumer segment. Loans growth in this segment expanded +4.0%yoy to RM171.5b mainly supported by mortgages where it saw expansion in Malaysia (+10.1%yoy), Thailand (+5.7%yoy) and Indonesia (+8.9%yoy). Meanwhile, excluding forex effect, total gross loans grew +7.0%yoy with Malaysia the main contributor at +9.4%yoy. Thailand, Indonesia and Singapore saw loans growth in local currency of +6.3%yoy, +3.0%yoy and +11.0%yoy respectively.

Deposits affected by forex. Deposits expanded +1.5%yoy to RM354.0b as at 2QFY18. However, discounting the forex effect, deposits grew +4.7%yoy. Consumer CASA growth was robust in Malaysia and Indonesia, expanding +7.1%yoy and +7.9%yoy respectively. However, CASA declined in Thailand (-27.4%yoy) but we undestand that this was partly deliberate in order to whittle down the expnsive savings deposits.

Interim dividend of 13 sen. The Group is proposing an interim dividend of 13 sen or 51.6% payout ratio of reported net profit.

FY18 targets within reach. Recall, the management is targeting the following for FY18; (1) ROE of 10.5%, (2) Dividend payout ratio of 40-60%, (3) total loans growth of +6.0%yoy, (4) credit cost of 0.55-0.60%, (5) CET1 ratio of 12.0%, and (6) CI of 50.0%. We opine that the Group is on track to achieve its targets. Loans growth will be supported by the consumer segment in Malaysia, and is expected to pick up with drawdowns from corporate loans. We understand from our previous discussions with the management that the corporates have not cancelled any of its approved loans but merely delaying the drawdown. Possible headwinds will be the weakness in income, but we expect it to moderate in 2HFY18. In addition, the management have indicated that cost will be contained and credit cost is expected to be better than targeted.

FORECAST

We make no change to our forecasts.

VALUATION AND RECOMMENDATION

We opine that the Group perform well to mitigate the contraction in income by containing cost and provisions. We believe this will be the key for the Group to achieve its ROE target for this year. Meanwhile, growth have been robust in Malaysia and recovery in Thailand will support the Group’s overall performance. Hence, we are maintaining our BUY call with unchanged TP of RM7.85 based on pegging its FY19 BVPS to a PBV of 1.3x. Also, we believe the expected dividend yield of 4.3% will limit any downside risk.

Source: MIDF Research - 30 Aug 2018