Review

• CIMB reported a better set of YoY results. Core net profit climbed 14.5% YoY to RM2,701mn from RM2,359.0mn in 1HFY18. Accounting for around 55% of ours and consensus forecasts, CIMB’s results were in line with expectations. Tracking FY19 targets, annualised ROE stood at 9.7% - exceeding guidance of 9.2% to 9.5% slightly.

• The group proposed first interim dividend of 14.0 sen/share. This translates to a dividend payout ratio of 50.4% based on reported net profit. The Dividend Reinvestment Scheme (DRS) will apply to this first interim dividend. Capital position is healthy with CET1 ratio of 12.9%. LCR remains comfortably above 100% for all banking entities.

• Compared with 1HFY18, reported PBT contracted by 15.3% YoY due to one off gains from the disposal of CPAM and CPIAM amounting to RM928mn last year. Excluding that, CIMB’s underlying operations improved as 1HFY19 net interest income (NII) (including Islamic Banking operations) climbed 3.3% YoY, underpinned by loan growth of 6.9%. Exceeding FY19 target of 6%, the increase in loans was underpinned by healthy growths in all key segments namely consumer banking (+8.3% YoY), wholesale banking (+6.3% YoY) and commercial banking (+4.4% YoY).

• Excluding FX fluctuations, the increase in loans and advances were underpinned by Thailand (+10.0% YoY), followed by Malaysia (+6.6% YoY) and Indonesia (+2.5% YoY). Loans in Singapore remained weak, contracting by 6.8% YoY. However, muting the impact from a more robust loan growth in the 1H, net interest margin (NIM) contracted to 2.46% from 2.50% in FY18. The decline was underpinned by the rate cut in Malaysia, though the impact was cushioned by improved NIMs in CIMB Niaga.

• Total deposits expanded by 9.9%, attributed mostly to a 16% YoY increase in consumer banking followed by a 9.1% YoY increase wholesale banking deposits. Meanwhile, deposit balances in commercial banking declined by some 2.5% YoY. Driven by intense competition in this space, the CASA ratio slipped to 34.4% from 35.6% in June 2018.

• Noting improvements in capital market activities, the non-interest income (non-NII) (including Islamic Banking operations) accelerated by 33.3% QoQ and 8.5% YoY. The improvement was due to stronger trading and FX income, which ballooned from RM656mn in 1HFY18 to RM1,011mn in 1HFY19, from better capital market activity. Muting the increase however, fees and commission as well as brokerage fees fell by 3.3% and 8.3% YoY.

• Total operating expenses grew 8.7% YoY (-0.3% QoQ) but mainly from investments and Foward23-related expenses. Management noted that excluding these, core opex rose by 3.7%, and was 2.7% lower QoQ. In descending order, marketing expenses jumped 17.2% YoY (+30.9% QoQ), followed by admin & general expenses (+11.5% YoY, +4.7% QoQ). Overall personnel costs climbed 10.0% YoY (-2.8% QoQ), led by higher personnel costs in Malaysia and Thailand in the earlier part of the year. CIMB’s cost-to-income (CTI) ratio stood at 53.2% (FY18: 52.6%).

• On a positive note, loan provisions continued to show improvement, falling YoY to RM629mn vs. RM746mn in 1HFY18. Loan loss charge eased to 35 bps from 41 bps in FY18, on track within CIMB’s 40-50 bps target for FY19. Noting slight QoQ uptick in provisions, management attributed the increase to some weaknesses in Consumer (due to festive seasonal factors) and Wholesale Banking (from higher corporate provisions in Malaysia and Indonesia) during the quarter. Nevertheless, the group’s headline asset quality indicators remained stable with gross impaired loans ratio strengthening to 3.1% vs. 3.2% in 1HFY18 while the allowance coverage softened to 96.6% (1HFY18: 106.8%).

Impact

• Keeping FY19 assumptions and profit forecast largely unchanged, we lowered our FY20 and FY21 projections by revising loan and fee income growth assumptions on the back of more easing envisaged from a prolonged trade war. We also foresee further contraction in NIM due to potential additional rate cuts. Taken together, we adjusted our FY20/21 net profit forecasts to RM5,101/5,295bn from RM5,646/5,695bn previously.

Outlook

• Management noted that the operating environment remains challenging. While loan growth, capital and asset quality target appears to be on track, 2019 ROE and CIR targets are dependent on revenue growth. As such, maintaining more modest guiding for FY19, ROE is expected to fall to between 9% and 9.5% as loan growth eases to around 6% and CTI ratio remains flat. Although loan loss charge was slightly better-than-expected in the 1H, management is maintaining its guidance of 40 and 50bps for the FY, as the weak market undertone gives rise to potential asset quality risks.

• In the longer term, management believes that the new mid-term Forward23 aspirations include lifting ROE to 12-13% and CTI ratio to reduce to 45% by 2023 is progressing as planned. To recap, strategies are in place to scale up contributions in Malaysia and Indonesia to more than 80% by targeting to capture market shares and reigniting growth engines. For now, we continue to believe that some targets such as raising market share and market growth in Malaysia by more than 1.5x may be challenging, given intense competition amid the saturated market space in Malaysia and weak external backdrop.

Valuation

• Deriving an implied PBV of 0.96x based on the Gordon Growth Model, we adjust CIMB’s TP to RM5.50 from RM5.80, underpinned by the downward revision to our FY20 earnings forecast. Nevertheless, we reiterate our BUY recommendation on CIMB due to a potential upside in excess of 12%.

• Key upside/downside risks to our fair value include: 1) softening asset quality risks in Thailand, Singapore and Indonesia, 2) pick up in treasury and capital market activities, 3) strengthening of CIMB’s regional proposition and capturing opportunities in high potential emerging economies such as Vietnam and Philippines, 4) better-than-expected contribution from strategic tie-ups such as China Galaxy, Principal Asset Management and Touch n’Go’s tie up with Ant Financial, and 5) successfully managing costs.

Source: TA Research - 30 Aug 2019