INVESTMENT HIGHLIGHTS

• Lower provisions and strong NOII growth drove double digit earnings growth

• Bearing fruit from focusing on improving asset quality

• Resulting in sacrificing NIM slightly

• Good growth in loans to consumer and SME segments

• No change to our forecast

• Maintain BUY with unchanged TP of RM7.70 pegging the stock to 1.3x FY19 Price-to-Book multiple

Strong earnings growth from lower provisions. CIMB Niaga FY18 net profit grew +16.9%yoy driven by lower provisions. Provisions fell -25.7%yoy as it reaps the efforts from improving its asset quality. Gross NPL fell -64bps yoy as at 4QFY18 to 3.11%.

Broad base asset quality improvement... We noted that while consumer gross NPL was flat at 2.5% as at 4QFY18, the corporate and SME segment gross NPL improved -120bps yoy and -50bps yoy to 1.3% and 3.0% respectively. More notable was the improvement in gross NPL of the commercial segment as it reached an inflection point and expected to trend further downwards. It came at 7.9% as at 4QFY18 from 9.3% as at 2QFY18 and 8.2% as at 4QFY17.

... but sacrificed NIM and asset growth to achieve this. NIM compressed by -6bps qoq and -9bps yoy in 4QFY18. As for FY18, NIM fell -48bps yoy. We understand the NIM compression was a combination of the aggressive policy rate hikes by Bank Indonesia and as a result of the management's focus on improving asset quality. This in particular led CIMB Niaga to opt for better quality assets which in general have lower yields. Another consequence was that gross loans grew at +1.8%yoy to IDR188.47t. Nevertheless, mortgages (+11.2%yoy to IDR30.0t), credit cards (+5.5%yoy to IDR8.6t) and SME loans (+8.5%yoy to IDR29.6t) grew robustly.

NOII helped to moderate NII weakness. NII fell -3.2%yoy from the NIM compression and sluggish loans growth but this was moderated by NOII expansion of +13.8%yoy. This was mainly due to higher recoveries (+55.5%yoy to IDR619b) and forex & fixed income derivatives (+30.0%yoy to IDR940b).

Source: MIDF Research - 21 Feb 2019