We think investors may be disappointed by another weak set of numbers from CIMB Niaga (Niaga). Loan provisioning rose sequentially in 4Q15, which raises the risk that CIMB’s results may disappoint. More mportantly, its capital ratio targets may be missed, which could stoke concerns regarding the need for fresh equity. We maintain our SELL call on CIMB and MYR4.15 TP.

We keep our earnings forecasts, which already factor in restructuring costs and related savings; our 2015F net profit of MYR2.9bn implies a 12% QoQ rise in reported bottomline. However, with Niaga‟s loan provisioning staying elevated, we think there is a risk full-year group credit cost could come in above our 69bps forecast, resulting in reported profit falling short of our estimates. Also, if 4Q15 earnings are weak, the targeted 9.5-9.75% group CET-1 ratio by end-2015 may be under threat (Sep 2015 CET-1: 9%, fully loaded). We stated previously that CIMB may need to raise MYR4bn-6bn in order to increase its CET-1 ratio to 10.5-11% (based on its capital position as at 30 Sep). No change to our SELL call and GGM-derived TP of MYR4.15 at this juncture; our GGM assumes: i) COE of 10.6%, ii) ROE of 9.75%, and iii) 5.5% long-term growth. Our TP is based on 2016F P/BV of 0.84x.

Results highlights. Excluding „one-off‟ costs such as employee mutual separation scheme (MSS) of IDR471bn in 3Q15 and restructuring costs of IDR100bn in 4Q15, Niaga‟s 4Q15 underlying net profit fell 46% QoQ as loan impairment provisions rose 17% QoQ (rise attributed to weak environment). Pre-impairment operating profit (underlying) was down 7% QoQ due to net interest margin pressure and upward pressure from non-personnel costs. Asset quality was stable sequentially, as were special mentioned accounts. With the higher provisioning, loan loss coverage (based on impaired loans classification) improved to 83% from 74% at end-Sep 2015.

Briefing highlights. The IDR100bn restructuring costs during 4Q15 relate to its microfinance business (80 branches were closed) and merging its auto businesses. At this stage, management does not foresee any further significant restructuring costs for 2016. Looking ahead, Niaga guided for 7-8% loan growth, with stronger momentum expected from 2H16. Net interest margin (NIM) was expected to be slightly below 5% (2015: 5.21%, based on Niaga‟s computation) due to the rebalancing of loan mix (better credit quality but lower yielding loans) and competition for deposits. The stable asset quality is a positive sign but management thinks more data points would be required before concluding the cycle has peaked. Niaga thinks 2016 credit cost should be lower, but no guidance was provided. There are no plans for further sale of bad loans at this juncture, but this may change depending on circumstances.

Source: RHB Research - 25 Feb 2016