CIMB - Dampened By Higher Loan Impairment Allowances

kiasutrader

Publish date: Wed, 19 Nov 2014, 09:13 AM

CIMB’s 3Q14 net profit of MYR890m (-16% YoY, -6% QoQ) missed consensus expectations, with the QoQ and YoY drop in net profit mainly due to higher loan impairment allowances (+119% YoY, +62% QoQ) that CIMB Niaga booked in. 9M14 annualised ROE was 11.6% (vs underlying 9M13 ROE of 14.4%) and CIMB said it would not be able to meet its 13.5-14% ROE target for 2014

¨ CIMB’s 3Q14 net profit of MYR890m (-16% YoY, -6% QoQ) was below consensus expectations, with 9M14 net profit of MYR2.9bn (-7% YoY, excluding gains from the disposal of CIMB Aviva and restructuring costs) accounting for 67% of consensus full-year estimates.

¨ Result highlights. 3Q14 positives were: i) a pickup in non-interest income (+15% QoQ) due to better treasury and markets, as well as investments income, ii) an uptick in loan growth (see below), although YTD growth was still below target, and iii) overheads were well-contained (+1% QoQ, -1% YoY). On the flipside, loan impairment allowances jumped 119% QoQ and 62% YoY due to higher provisioning required by CIMB Niaga. Thus, credit cost (annualised) rose to 56bps in 3Q14 (3Q13: 36bps; 2Q14: 24bps). Also, 3Q14 net interest margin was estimated to have compressed by 5bps QoQ and YoY, despite July’s 25bps OPR hike and the loan-to-deposit ratio (LDR) rising to 92.4% from 87.5% as at end-Jun 2014.

¨ Loan and deposit growth. Loan base expanded by 4% QoQ and 9% YoY (2Q14: flat QoQ, +8% YoY) with the improved momentum aided by corporate banking (+5% QoQ, +1% YoY). That said, annualised loan growth of 9% was below the 14% target. Meanwhile, customer deposits declined by 2% QoQ (flat YoY) as CIMB shed fixed and negotiable instruments of deposits but current account and saving account (CASA) deposits were flat QoQ (+2% YoY). CASA ratio stood at 35.4% at end-3Q14 (2Q14: 34.7%).

¨ Asset quality. Absolute gross impaired loans rose 9% QoQ (6% YoY) due to the deterioration in asset quality relating to CIMB Niaga’s coal exposure. With that, the gross impaired loan ratio saw a slight uptick to 3.28% from 3.12% at end-2Q14, while loan loss coverage (LLC) declined to 74.2% (end-2Q14: 79%).

¨ Capital. Group common equity tier 1 (CET-1) and double leverage ratios stood at 9.7% (end-Jun 2014: 9.5%) and 110.9% (end-Jun 2014: 110.3%) respectively, as at end-Sep 2014.

¨ Briefing highlights. CIMB said its 13.5-14% ROE target for 2014 will not be met given the challenging outlook for Indonesia

Briefing highlights

2014 ROE target will not be met. Management said its 2014 ROE target of 13.5-14% will not be met given the challenging outlook for Indonesia and weaker capital markets YTD. CIMB thinks the near-term outlook, ie 4Q14, would be stable for Malaysia and Thailand, negative for Indonesia but positive for Singapore. In terms of business segment, the outlook is stable across the majority of the businesses but CIMB was more cautious on regional corporate banking due to Indonesia. Management believes asset quality in Indonesia could see further deterioration in 4Q14 before improving in 2015 mainly due to its coal-related exposure. The recent fuel price hike is not expected to impact asset quality for now. Finally, CIMB did not provide a comfort level in terms of LLC but said that the loans were collateralised. However, if collateral values were to deteriorate, further provisioning would be required.

More optimistic on investment banking (IB) pipeline ahead. Management appeared optimistic that markets-related income would improve in 2015, citing expectations of better IB activities in 1H15 as compared to 1H14 and 2H14. The debt capital market pipeline was healthy while the group has gained market share in terms of forex across the region.

Liquidity coverage ratios above minimum requirements. Despite the rise in LDR as noted above, management said the main domestic operating entities met the minimum required liquidity ratios.