CIMB Niaga’s (Niaga) 2Q15 net profit fell 89% YoY to IDR94bn (+13% QoQ), as loan provisioning stayed elevated. We maintain our SELL call and MYR5.20 TP (3% downside) on CIMB. While Niaga expects loanprovisions to ease in 2H15 (vs 1H15), we note that asset quality indicators have yet to stabilise. Higher-than-expected credit costs and weaker-than-expected income levels pose risks to our 2015F numbers.

Results highlights. Niaga’s 2Q15 net profit remained weak as loan provisioning stayed elevated (albeit lower sequentially), while subdued economic conditions and market activities hampered topline growth. 2Q15 credit cost (annualised) was 289bps (1Q15: 329bps; 2Q14: 91bps)and Niaga maintained its guidance of lower loan provisions in 2H15 (vs1H15). That said, we note that asset quality deteriorated further in 2Q15 and this may mean that the improvement in 2H15 credit cost may not be too meaningful. 2Q15 absolute gross non-performing loans (NPLs) rose 8% QoQ (+59% YoY) while the gross NPL ratio ticked up to 4.3% from 4.1% at end-1Q15 (2Q14: 3%). More importantly, special mentioned loans were up 6% QoQ while Niaga’s gross impaired loan (reflects NPLs and some special mentioned loans that may potentially turn into NPLs) ratio rose to 5.7% from 5.3% in 1Q15 (2Q14: 3.9%). Although part of the rise could be seasonal due to festivities, investors will need to keep a watch on this.

Briefing highlights. Niaga’s mutual separation scheme (MSS) exercise was completed in July. The upfront cost amounts to IDR500bn (to be booked in 3Q15 results) while annual cost savings are IDR400bn. Niagais also exploring further cost-saving initiatives and hopes to share more details later this year. As mentioned above, management remained optimistic that 2H15 loan provisioning should be lower after having done an extensive review of its loan portfolio. That said, there could be some new NPLs in 2H115 from loans relating to the energy sector but the overall exposure to the oil and gas segment is low (<3% of loan book). Finally, the rebalancing of the loan portfolio towards better quality customers is ongoing but this, together with its digital banking initiatives,should put the group on a better footing ahead.

Forecasts and investment case. We keep our CIMB earnings forecasts for now, which already factored in restructuring costs and related savings. In our view, the operating environment, both domestic and overseas, remains challenging and this could result in weaker-thanexpected topline growth and/or further asset quality issues ahead. Thus, we retain our SELL recommendation and GGM-derived TP of MYR5.20.