We understand that its top-line will come under pressure in its 2Q19 results due to moderation in fund-based income, but bottom-line is poised to expand due to write-backs. Loans target of 6-7% is achievable driven by resilient household and pick-up from Niaga. BUY with a TP of RM6.45. based on FY20 target PBV of 1.06x (5-year mean). We feel this is justified as we have been conservative in our assumptions coupled with momentum from capital market activities picking up and corporate loans activities expected to gain traction from both Malaysia and Indonesia in 2020 coupled with a decent dividend yield of 4.3%

CIMB’s upcoming results is seen to be within expectations as capital market activities have improved plus writebacks. Top-line is expected to be driven by Islamic financing and fee-based income, but we expect fund-based income to moderate, primarily due to margin pressure.

Improvement will be seen from NOII and Islamic Income as CIMB is adopting an Islamic first approach with Islamic financing driven by the consumer space namely auto and mortgages. Management is maintaining its loans target of 6-7% for FY19 as we understand that on a YoY basis, loans are stronger, driven by consumer and SMEs with corporates picking up pace. Domestic loans are expected to be well above the system with Niaga’s loans driven by consumer space and expected to be picking up in 2H19.

No change in NIM guidance of 5-10bps compression for the Group but we expect moderate NII growth (in 2Q) due to the OPR cut in May with Indonesian NIM expected to remain as guided (at 5%). We believe that re-pricing of assets (due to better risk assessment) contributed to this NIM pressure despite loans traction gaining. Repricing of assets helped to stabilize NIM in 2Q19 (for Niaga), but we expect funding costs to trend higher as Niaga ramp up its loan book in 2H19.

No change of its guidance of 40-45bps in credit costs but we expect write-backs from its loan-loss provisions due to positive adjustments under the MFRS9. We understand that adjustments are due to occur every quarter but in this reporting season, there will be a significant positive adjustment. This positive adjustment comes mostly from the consumer space. Given the low interest rate environment ahead and likelihood of positive assessments of economic activities in the region, we do not discount positive adjustments in expected credit losses for FY20.

Source: Rakuten Research - 25 Jul 2019