Review

• Registering net profit of RM3,564mn, CIMB’s results are in line with ours and consensus’ expectations, as it represents 96% and 99% of full year estimates respectively. ROE stood at 8.3%, below management’s target of 10%.

• Sequentially, net profit contracted – erasing QoQ gains reported in 3Q. The weaker 4Q performance was mostly underpinned by higher loan allowances (+24.7% QoQ) and other impairment losses amounting to RM135mn vs. a net writebacks of RM16.0mn in 3Q.

• Compared to FY15, PBT broadened at a decent pace of 6.2%, premised on a combination of operating income growth (+4.4% YoY) and the ability to keep a lid on cost (+1.0% YoY). While other provisions ballooned to RM236mn vs. RM150mn a year ago, total loan impairment grew at modest pace of 11.1% YoY. Higher contributions of profit from JV and associates helped give some boost to the bottomline.

• NII (including Islamic Banking operations) advanced by 5.3% YoY. Total gross loans growth advanced by 8.7% YoY (+6.3% QoQ) – spurred by the weak MYR. Excluding FX fluctions, total gross loans accelerated by 6.4% YoY and 4.2% QoQ. The group’s total gross loans and advances stood at RM323.7bn. In their respective currencies, loan growth was led by Malaysia (+10.5% YoY), followed by Singapore (+4.9% YoY), Thailand (+2.1% YoY) and Indonesia (+1.6% YoY).

• Total deposits, meanwhile, expanded by 5.6% YoY (excluding forex fluctuations: +3.7% YoY). CASA grew at a healthy pace of 10.4%, partly underpinned by ongoing efforts to strengthen CASA deposits in Indonesia. Net interest margin (NIM) held relatively stable, slipping by only 3 bps YoY. We note that the impact from the OPR hike in July 2016 was slightly muted by revisions to the bank’s base rate in June. Management expects NIM in Malaysia to hold steady in 2017, while some compressions may still be observed in Indonesia.

• Non-NII broadened by 2.2%. While fee income slipped YoY, gains in overall non-NII were underpinned by net gains of RM150mn arising from the sale of its 51% interest in PT CIMB Sun Life in 3Q16. Nevertheless, overall nonNII was lacklustre in FY16 due to the soft capital market activities. This income segment was also weighed down by a massive increase in forex loss of RM884.6mn during the quarter, bringing FY16 FX loss to RM642.5mn from RM381.1mn.

• Overhead expenses widened by 1.0% YoY. In tandem with the group-wide cost management initiatives; personnel costs widened 1% YoY while establishment cost and marketing expenses slipped 0.8% and 13.4% YoY respectively. The cost-to-income ratio improved to 53.9% from 55.6% a year ago.

• Loan impairments advanced 11.1% YoY while other provisions surged by RM86mn, or 57.3% YoY. Loan loss charge stood at 74 bps, little changed from 73 bps in FY15. By segment, provisions were driven by commercial banking (+199.5% YoY) while consumer banking and wholesale banking

stayed resilient - improving YoY. Loan impairments were largely driven by provisions for the commercial segments in Indonesia and Thailand. Meanwhile, the group’s gross impaired loans ratio deteriorated to 3.3% from 3.0% a year ago. The allowance coverage weakened to 79.8% from 84.7% a year ago.

• By capital position, the CIMB group’s CET1 and Total Capital Ratio stood at 11.3% and 16.4%. Ongoing T18 plans include raising CET1 to 12% and RWA optimisation. RWA savings initiatives are currently underway in Malaysia and Singapore.

• The group declared a second interim net dividend of 12 sen/share to be paid via cash or an optional Dividend Reinvestment Scheme (DRS). For FY16, the total dividend amounted to 20 sen/share, translating to a dividend payout ratio of 49.5% of FY16 profits.

Impact

• Incorporating FY16 results, we tweaked our FY17 and FY18 net profit estimates to RM4,486.3 and RM4,933.4. We forecast net profit to increase by some 8.5% in FY19 to RM5,350.7mn.

Outlook

• Despite better results, most of management’s key targets such as ROE, loan growth, loan loss charge and CTI ratio were not met owing to ongoing challenges in the external economic environment. Management appears to be more optimistic with the outlook in 2017. Guiding for ROE of 9.5% (vs. 8.3% in FY16), the increase in returns are premised on expectations of: 1) better asset quality, and 2) savings from ongoing cost management intiatives such as the implementation of new Group Delegated Authority framework to improve overall financial discipline and strategic procurement system implementation underway for the region. While still elevated, loan loss charge should soften to 60-65 bps from 74 bps.

• By country, growth in Malaysia will be driven by consumer banking. Asset quality in Malaysia has also shown no signs of systemic strain, for now. In Indonesia, provisions should improve while topline growth will be supported by continued focus on loans and CASA growth. We note that contribution from Indonesia has expanded to 17% of group’s PBT, a healthy increase from 8% a year ago. The outlook for CIMB Thai has also improved on the back of lower provisions envisaged. Over in Singapore, the bank’s growth prospects will hinge on regional economic growth.

Valuation

• TP is maintained at RM5.60. This translates to an implied FY17 PBV of 1.05x. CIMB is currently trading at PBV of 0.93x, a slight discount to the industry’s 1.12x. BUY maintained on the back of attractive valuations.

• Key upside/downside risks to our fair value include: 1) rising asset quality risks in Thailand, Singapore and Indonesia, 2) pick up in treasury and capital market activities, 3) more severe-than-expected margin compression especially in Indonesia, and 4) successfully reduce cost to below the targeted 53% CTI, and 5) other external risk factors due to uncertainties in the global market.

Source: TA Research - 1 Mar 2017