KEY INVESTMENT HIGHLIGHTS

• Ended the year strongly with a rebound in earnings

• Income growth supported by NOII expansion as NIM compression took its toll to NII in 4QFY19

• Higher OPEX due to law and Fast Forward strategy

• Remedial actions taken led to lower provisions

• No change to FY19 and FY20 earnings forecast

• Maintain BUY with unchanged TP of RM6.30

Strong end to the year. The Group’s operating subsidiary CIMB Thai ended the year strongly as it earnings recovered to THB1.50b. This was due to the rebound in 4QFY19 where earnings turned positive as compared to losses in the same quarter last year. Main contributor for the strong performance this year was the lower provisions.

Income growth from NOII expansion. Net income grew +3.5%yoy supported by the +10.6%yoy expansion in NOII. While NII have been solid for 9MFY19 (+3.1%yoy), it fell in 4QFY19, leading to an increase of only +1.5%yoy. This was due to the impact of NIM compression of - 40bp to 3.31% coming from higher cost of fund.

Combination of strategy and the law led to higher OPEX. Operating expenses (OPEX) rose by +14.1%yoy. This was mainly due to higher general expenses and personnel cost. These were expenses incurred due to the Fast Forward expansion strategy. Also, 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.

Remedial actions led to lower provisions. Provisions came off by - 48.7%yoy in FY19. This was the result from remedial actions taken to improve its assets quality.

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.

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

Valuation and recommendation. The situation had improve in Thailand as we had expected. This was evident by CIMB Thai’s FY19 earnings performance. Furthermore, provisions continue to be on a downtrend. Our only concern was the NIM compression. However, we understand that deposits competition in Thailand is currently stable and this should limit the pressure to NIM. As such, we believe that the Group’s business in Thailand continues to be sound. 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 - 22 Jan 2020