CIMB  Niaga’s  (Niaga)  4Q14  net  profit  fell  96%  YoY  and  86%  QoQ  to IDR46bn due to a spike in  loan provisioning  mainly relating to its  coalportfolio.  We  maintain  our  SELL  call  on  CIMB  and  MYR5.20  TP. Absolute gross NPLs rose 23% QoQ but the higher provisioning means that LLC improved to 89% from 83% at end-Sep 2014. That said, Niaga’s LLC target of 100% suggests more provisioning could follow this year.

Results  highlights.  As  expected,  Niaga’s  weaker  4Q  results  were mainly  caused  by  higher  loan  impairment  allowances  (+430% YoY/+107% QoQ) relating to its coal exposure. Thus, credit cost surged to 456bps (annualised) in 4Q14  vs 229bps in 3Q14 (4Q13: 95bps). With the  classification  of  the  coal-related  loans  as  non-performing  loans (NPLs),  absolute  gross  NPLs  rose  23%  QoQ  (+98%  YoY)  while  the gross  NPL  ratio  ticked  up  to  3.9%  from  3.35%  at  end-3Q14  (4Q13: 2.23%). The higher provisioning, however, helped  build up the NPL loan loss  coverage  (LLC)  to  88.8%  from  82.9%  at  end-3Q14.  Otherwise, 4Q14  operating  income  rose  17%  QoQ/7%  YoY  on  the  back  of  loan growth  picking  up  pace  (+6%  QoQ/+12%  YoY)  while  NIM  improved. Niaga also recognised lumpy non-interest income relating to gains from the disposal of building (IDR238bn).

Briefing highlights.  Niaga guided for  low-teen loan growth this year vs 15-17% for the industry. Focus is on working capital loans to high quality commercial  and  corporate  customers.  Niaga  will  be  sacrificing  loan yields upfront (better quality credit), hence, putting pressure on NIMs but over  time,  Niaga  expects  this  relationship  to  result  in  good  current account, savings account (CASA)  growth as well as cross-sell potential. In  terms  of  its  coal  exposure,  this  currently  stands  at  around  IDR7trn (4.8%  of  loan  book),  of  which,  68%  have  been   classified  as  NPLs. Management acknowledged the drop in  LLC  (89% as at end-2014) and has a target coverage of 100%.

Forecasts  and investment  case.  We  keep  our  earnings  forecasts for CIMB  unchanged  but  think  downside  risks  to  our  2015F  numbers  are rising.  The  ‘clean-up’  exercise  for  CIMB’s  loan  portfolio  is  expected  to spill  over  into  1Q15,  which  may  lead  to  credit  costs  staying  elevated. Also,  we  would  not be  surprised  if the  reorganisation  and restructuring initiatives (T18) involve  some  frontloading  of  costs in  2015.  Hence,  we retain our SELL call with an unchanged GGM-derived TP of MYR5.20.