CIMB Niaga (Niaga) reported 2Q14 net profit  of IDR854bn  (-21% y-o-y,  -22% q-o-q). The decline was due to a combination of softer non-interest income  as  well  as  higher  overheads  and  credit  cost.   Managementthinks the recent elections may have impacted loan growth and asset quality and it may take until 4Q14 for the distraction to pass.  Maintain NEUTRAL, with a GGM-derived FV of MYR7.75.

Results highlights.  Niaga reported 2Q14 net profit of IDR854bn  (-21% y-o-y; -22% q-o-q), which brought 1H14 net profit to IDR2trn (-8% y-o-y). The weaker 2Q net profit was caused by a combination of: i) softer noninterest income as treasury (fixed income) and bancassurance fees were weaker, ii) higher overheads due to inflationary pressures, and iii) higher credit  cost  as  asset  quality  deteriorated.  Absolute  gross  NPLs  and special-mention  accounts  rose  18%  and  16%  q-o-q  respectively  while the  gross  impaired  loan  ratio  deteriorated  to  3.9%  from  3.1%  at  end -1Q14.  Meanwhile,  loan  growth  was  muted  (10%,  annualised)  as  the retail and corporate segments had a slower quarter. A bright spot was, surprisingly,  its net interest margin (NIM), which rose  6bps q-o-q (-4bps y-o-y) due to the repricing of loans and focus on low cost deposits.

Briefing  highlights.  Management  believes  the  uptick  in  NPLs  came mainly from the commercial/SME segment, which has yet to adjust to the higher  inflation  and  interest  rate  environment.  The  elections  also potentially  distracted  government-linked  agencies,  causing  delays  in payment of  claims.  The  sectors  impacted include  printing, oil  and  gas, hotel  and  power  producers. Nevertheless,  Niaga  highlighted  that  these NPLs are well collateralised. Management also toned down loan growth expectations, guiding for a full-year growth of around 1H levels, ie 9-10% vs  13-15%  previously.  The  election  has  caused  the  retail  segment  to adopt  a  wait-and-see  attitude,  while  the  rise  in  lending  rates  has impacted demand from the commercial segment. It  was still hopeful that credit  demand  from  corporates  would  be  healthy  after  slowing  down growth last year. Overall, Niaga believes it would be business as usual once the election distraction passes, but this could take until 4Q14.

Forecasts  and  investment  case.  We  make  no  change  to  our  CIMBearnings forecasts for nw. Niaga contributed 28% to group pre-tax profit in 1Q14.  Maintain NEUTRAL,  with a GGM-derived  FV of MYR7.75. Our GGM assumes: i) cost of equity of 10.3%, ii) long term growth of 6%, iii) sustainable ROE of 13.2%, and iv) FY14F BV/share of MYR4.62.

Source: RHB