CIMB’s  3QFY13 results were largely within  our and street  expectations. Although  the  stock  faces  headwinds  from  Indonesia’s  challenging macro conditions,  capital markets have recovered post-Sept  2013 while asset quality has held up well thus far. We continue to see any  further sharp  selldown  as  an  opportunity  to  accumulate  the  stock.  Maintain BUY, with a revised MYR9.50 FV, based on a CY14 P/E of 14x.

• 3QFY13 results  in line.  CIMB’s 3QFY13  net profit of MYR1.06bn (-7% y-o-y;  +1%  q-o-q)  was  broadly  within  expectations,  with  9MFY13 reported net profit  of  MYR3.5bn (+7% y-o-y), accounting for 74% of our and 76% of consensus full-year net profit estimates.
• Result highlights.  Positive takeaways were: i) loan growth was resilient with  annualised  growth  of  12.8%  above  our  11%  assumption,  ii)  costs were largely  contained (+1% q-o-q; +3% y-o-y), but the cost-to-income ratio  (CIR)  stayed  high  at  59%,  and  iii)  absolute  gross  impaired  loans and  impaired  loan  ratios  improved  further.  On  the  flipside,  loan impairment  allowances  were  up  (2.5-3x  higher  q-o-q  and y-o-y),  which were partly seasonal due to festive holidays and are expected to reverse in 4Q13, according to CIMB. Non-interest income (-1% q-o-q;  -10% y-oy) was impacted by challenging market conditions during the quarter.
• Briefing  highlights.  Management  appeared  optimistic  with  respect  to 4Q13  operating  income.  Investment  banking  (IB)  activities  have improved post-3Q13  (DCM, ECM and IPO all up in October), supported by consumer (Malaysia and Singapore) and  regional corporate banking.
• These, however, would be tempered by an additional MYR62m provision for  its  Mutual  Separation  Scheme  (MSS)  due  to  the  higher  number  of confirmed exits. CIMB guided for annual cost savings of MYR130m from the MSS. CIMB Niaga (Niaga) is still a potential soft spot for asset quality but no major red flags have been  noted thus far. Overall, CIMB retained its 16% ROE target for 2013.
• Forecasts.  We lower  our FY13F-14F net profit forecasts by 2-2.5% to reflect higher overheads.
• Investment case.  We  tweak  down our FV to MYR9.50 from  MYR9.75 (target CY14 P/E of 14x unchanged), but keep our BUY call. Indonesia’s challenging  macro  conditions  are  still  a  key  headwind  but,  at  least, capital markets  appear to be improving. Also, valuations  are still decent and we think any sharp selldown is an opportunity to buy.

3QFY13 results review
3QFY13 results in line. CIMB’s 3QFY13 net profit of MYR1.06bn (-7% y-o-y; +1% qo-q)  brought  9MFY13  reported  net  profit  to  MYR3.5bn  (+7%  y-o-y),  accounting  for 74%  of  our  and  76%  of  consensus  full-year  net  profit  estimates.  We  consider  the results  to  be  broadly  in  line  with  expectations.  Overheads  (annualised)  were  3% higher than estimates, cushioned by lower-than-expected credit cost of 24bps (vs our 36bps assumption). The 9M13 results also include  the  MYR515m gain from the  sale of  CIMB  Aviva  and  restructuring  charges  of  MYR200m  (writeoff  of  intangibles  and costs relating to the MSS). These items have been incorporated in our forecasts.

Result highlights. 3QFY13 net interest income was healthy, up 2% q-o-q and 3% yo-y  as loan growth was resilient while NIM, by our estimates,  was  up 5bps  q-o-q/-35bps y-o-y  (-7bps  q-o-q according to CIMB due to adjustments to the domestic HP portfolio). Non-interest income, however, was  marginally lower q-o-q (-1% q-o-q) but was  down 10% y-o-y,  mainly in the absence of  share of recoveries from bad loans managed  by  Thai  Asset  Management  Corp  (TAMC)  (3Q12:  MYR134m).  Excluding this, non-interest income would have been 1% higher y -o-y. Overall, 3Q13 operating income was up 1% q-o-q but down 2% y-o-y. Expenses were generally under control, +1%  q-o-q/+3%  y-o-y  and  hence,  CIR  remained  largely  unchanged  q-o-q  at  59% (3Q12:  56.6%).  The  main  dampener  was  the  higher  loan  impairment  allowances, which stood at MYR210m (2Q13:  MYR71m; 3Q12: MYR79m). According to CIMB, the rise was due to a combination of festivities and higher provisioning  set aside by Niaga. Nevertheless, management has not noted any major issues on asset quality and  the  higher  provisioning  in  3Q13  is  expected  to  reverse  come  4Q.  Also,  3Q13 annualised credit cost of  36bps was still within  the <40bps guided for the full  year.

The  higher  3Q13  credit  cost,  however,  was  cushioned  by  lumpy  gains  from associate, Tune Money, resulting in pre-tax profit staying flat q-o-q (-7% y-o-y). Underlying  9MFY13  pre-tax  profit  was  down  3%  y-o-y  mainly  due  to  higher  loan impairment  allowances  (+26%  y-o-y)  and  delays  in  the  startup  of  Royal  Bank  of Scotland (RBS)’ operations, partly offset by  stronger contributions from associates, which were driven by Tune Money.

Loan and deposit growth.  Group loan growth  momentum stayed healthy  at +2.5% q-o-q  and +13.7% y-o-y (2Q13: +3.7% q-o-q; +11.4% y-o-y), resulting in annualised loan growth of  12.8%, ahead of our 11% assumption  and the 12% guidance.  Y-o-y growth  would  have  been  even  stronger  (+250bps)  if  not  for  adverse  forex fluctuations.  Sequentially,  the  group  enjoyed  good  traction  in  Malaysia/Singapore consumer  banking  (+2%  q-o-q)  and  regional  corporate  banking  (+4.9%  q-o-q), although  growth  in  corporate  loans  in  Indonesia  remained  soft.  Meanwhile,  group customer  deposits  rose  1.4%  q-o-q  (+13.2%  y-o-y)  as  the  group  shed  some  of  its costlier  fixed  deposits  to  help  manage  margins.  Current  accounts  and  saving accounts  (CASA)  growth,  however,  was  strong  (+3.7%  q-o-q;  +14.4%  y-o-y)  with growth  robust  in  all  key  markets.  Consequently,  group  LDR  rose  to  84.8%  from 83.8%  at  end-June  2013  (end-3Q12:  83.8%),  while  the  CASA  ratio  increased  by 70bps q-o-q to 34.9%.

Asset quality and capital.  Group asset quality improved further with absolute gross impaired loans  declining by 2.5% q-o-q (-8.4% y-o-y). Although the net impaired loan formation rate  saw an uptick (92bps vs  2Q13: 59bps), recoveries and writeoffs were also  higher  sequentially,  leading  to  the  drop  in  absolute  gross  impaired  loans. Together with the continued loan growth,  the gross impaired loan ratio  improved by 17bps q-o-q to 3.39%, but loan loss coverage (LLC) was stable q-o-q at 82%. Finally, CIMB disclosed group CET-1 of 8.2% (end-June 2013: 8.4%).

Briefing highlights
Management appeared optimistic with respect to 4Q13 operating income. IB activities have  improved  post-3Q13  (DCM,  ECM  and  IPO  all  up  in  October  but  M&A  still lacklustre)  and  more importantly, deals are crystalising. Potentially, the delay in QE tapering by the Fed has opened a window of opportunity for issuances. This would be further  supported  by  consumer  (Malaysia  and  Singapore)  and  regional  corporate banking.  Contribution  from  Niaga,  however,  is  expected  to  remain  muted. Competition for deposits there is stiff and coupled with the recent hike in policy rate, NIM is likely to come under pressure in 4Q13.

In terms of overheads, the number of confirmed exits under the Mutual Separation Scheme  (MSS)  has  risen  to  1,217  from  867.  With  that,  an  additional  MYR62m provision will be made in 4Q13, taking the total MSS cost to MYR217m. CIMB guided for annual cost savings of MYR130m from the exercise, which  will help cushion the MYR300m running cost p.a. for RBS.  As mentioned previously,  the breakeven time frame for RBS has slipped due to delays in commencement of operations (eg delays in licensing), but the acquisition is expected to, at least, break even next year.

As for asset quality, the higher provisioning for the local consumer bank was largely seasonal due to  the festive holidays  and is expected to reverse in 4Q13.  As for the uptick  in  non-performing  loans  (NPLs)  in  Indonesia,  management  is  not  overly concerned at this stage and thinks that corporates there are in a better position today to withstand effects from a depreciating IDR. Overall, CIMB retained its 16% ROE target for 2013.  No targets were mentioned for 2014,  but  the  growth  in  asset  base  this  year,  expected  improvements  in  IB  and treasury markets next year, as well as stronger contribution from RBS should all help contribute to topline growth next year.

Risks
The  risks  include:  i)  slower-than-expected  loan  growth,  ii)  weaker-than-expected NIMS, iii) weaker-than-expected capital market activities, iv)  a  deterioration in asset quality, and v) adverse foreign exchange movements, which will adversely impact the translation of results of its foreign subsidiaries.

Forecasts
We  raise  our  FY13F-14F  overhead  projections  by  1.5-2%  to  reflect  the  additional MSS provision to be made in 4Q13 as well as higher-than-expected costs YTD. All in, we lower our FY13F-14F net profit forecasts by 2-2.5%.

Valuations and recommendation
Following  the  earnings  revisions  above,  we  tweak  down  our  FV  to  MYR9.50  from MYR9.75. Our target 2014 P/E multiple of 14x is unchanged. This is at a discount to our sector benchmark P/E of 15x to reflect the higher earnings risk due to, eg the tougher macro environment in Indonesia.

Admittedly,  the  stock  continues  to  face  headwinds  from  Indonesia’s  challenging macro  conditions,  among  others.  However,  capital  market  conditions  have  seen some  improvement  and  we  remain  positive  on  the  outlook  for  the  domestic  front thanks to the emergence of a new investment cycle.  In our view, the group’s strong domestic corporate presence means CIMB  will  be one of the major beneficiaries  of the rollout of the  Economic Transformation Programme (ETP)  projects.  Malaysia still contributes  the  bulk  of  group  PBT  (9M13:  62%).  Apart  from  that,  other  re-rating catalysts  we  see  include  more  positive  news  flow  on  Indonesia’s  macro  front,  a stronger pickup in  capital market activities and cost restructuring  initiatives bearing fruit.  Maintain  BUY.  We believe any further sharp selldown is a good  opportunity to accumulate the stock.

Source: RHB