CIMB Niaga’s (Niaga) 1Q16 results were muted due to the soft operating environment and ele vated loan provisioning. However, CASA growth has been robust, providing support to NIM. We also note that loan loss coverage (LLC) le vels continue to strengthen, which provides us with some comfort that the worst may be past with respect to credit cost. We maintain our NEUTRAL call on CIMB and MYR4.50 TP (4% downside).

Briefing highlights. For now, management retains their 7-8% 2016 loan growth target. Niaga also explained that the economic environment was still weak, leading to the rise in special mention accounts . The increase was broad-based, from companies in industries from manufacturing to transport, textiles, as well as construction-related. That said, with several accounts undergoing restructuring, these loans should be reclassified as performing in 2Q or 3Q16. The non-performing loan (NPL) ratio for its coal portfolio stood at 8.5%, while coal NPLs made up a third of total NPLs. Loan loss coverage for its coal NPLs is about 70%. Finally, as guided earlier, credit cost is expected to stay elevated in 1H16 as Niaga continues to set aside provisioning due to the drop in collateral values – but 2H16 should see improvement. Overall, Niaga thinks 2016 credit cost should be lower vs 2015.

Forecasts and investment case. No change to our earnings forecasts for CIMB Group, Gordon Growth Model (GGM)-derived TP of MYR4.50 and NEUTRAL recommendation. Our GGM assumes COE of 10.6%, ROE of 10%, and 5.5% long-term growth. Our TP is based on 2016F P/BV o f 0.89x. While we are generally cautious with respect to the prospects for banking stocks ahead – we believe asset quality could be heading for a softe r patch as well as tighter liquidity conditions – CIMB may be ahead of the other banks with respect to the loan provisioning cycle. Last year’s cost management initiatives should also filter through to help cushion the impact of elevated credit cost and/or weak income growth.

Results highlights. Niaga’s 1Q16 net profit rose 224% YoY (+13% QoQ, excluding one-off costs relating to its employee mutual s eparation scheme (MSS) in 4Q15) due to a combination of 3% YoY pre-provision operating profit growth and lower credit cost of 280bps (1Q15: 329bps). Loan base contracted by a low single-digit due to the soft environment and a more selective approach to growth but current account, saving account (CASA) growth was robust. This allowed Niaga to shed costlier tim e deposits and underpin 1Q16’s net interest margin (NIM) expansion.

Asset quality. Absolute gross NPLs were stable QoQ but the gross NPL ratio ticked up 16bps QoQ to 3.9%, due to the smaller loan base. Special mention accounts also rose 23% QoQ. With loan provisioning staying elevated, Niaga’s loan loss coverage improved further to 116% (4Q15: 112%).

Source: RHB Research - 3 May 2016