KEY INVESTMENT HIGHLIGHTS

• Strong momentum in earnings in 3QFY19

• Robust income and lower provisions were main contributors

• Asset quality remain stable despite slight uptick in NPL

• Higher OPEX due to law and Fast Forward strategy

• No change to FY19 and FY20 earnings forecast

• Maintain BUY with unchanged TP of RM6.30

Strong momentum. The Group’s operating subsidiary CIMB Thai posted strong earnings momentum in 3QFY19, whereby net profit grew +68.2%yoy. This resulted in 9MFY19 earnings to expand +35.5%yoy. Main contributor for the strong performance this year was the net interest income (NII) growth and lower provisions.

Income growth from NII expansion. NII for 9MFY19 grew +3.1%yoy despite net interest margin (NIM) compression of -45bp yoy to 3.32% owing to higher cost of fund. However, this was compensated by the loans expansion and higher interest income on investments. Total gross loans grew +5.5% on a year-to-date basis to THB240.2b as at 3QFY19.

Asset quality stable. There was a slight uptick in gross nonperforming loans (NPL) ratio at 4.6% from 4.3% as at 4QFY18. It stood at THB11.1b. Main reason was due to certain corporate accounts and retail segments.

Higher OPEX due to law and strategy. Operating expenses (OPEX) rose by +17.4%yoy. This was mainly due to higher general expenses and personnel cost. The higher personnel cost was attributed to an amendment bill to the Labour Protection Law which required higher compensation for employees who have retired or have been in service for over 20 years. In addition, there was expenses incurred from the Fast Forward expansion strategy. As a result the cost to income ratio was higher at 68.8% in 9MFY19 compared to 59.9% in 9MFY18.

No change in earnings forecast. We are maintaining our earnings forecast for FY19 and FY20.

Valuation and recommendation. As we expected, the situation had improve in Thailand, as evident by 3QFY19 result of CIMB Thai. Furthermore, provisions continue to be on a downtrend. We were also encouraged to see income grew robustly despite NIM compression. As such, we believe that the Group’s business in Thailand continues to be sound. Also, it seems that Group is expanding there as highlighted by the higher expenses incurred. We do not believe that CIMB Thai will be a drag to the Group's earnings, which we expect to remain solid this year. All-in, we are maintaining our BUY call with TP of RM6.30, derived by pegging its FY20 BVPS to PBV of 1.1x.

Source: MIDF Research - 23 Oct 2019