We met up with management recently. Key takeaways from the meeting are as follows:

Decent set of 3Q results envisaged

Similar to the better performance in 2Q, management expects another set of decent results for 3Q. To recap, core net profit climbed 14.5% YoY to RM2,701mn in 1HFY19 from RM2,359.0mn in 1HFY18. Accounting for around 55% of ours and consensus forecasts, CIMB’s results were in line with expectations. In the upcoming results, we foresee total income to increase, on a YoY basis due to a combination of loan growth expansion, stronger noninterest income and lower loan provisions.

Maintaining FY19 ROE target

Annualised 1HFY19 ROE stood at 9.7% - exceeding guidance of 9.2% to 9.5%. Despite the overall weak macro backdrop, management appears confident in meeting the ROE target – supported by smallish gains from the sale of some NPLs, stronger topline growth and benign credit cost. In Malaysia, NIM is expected to get some uplift – sequentially, from repricing of deposits post the OPR cut in the earlier part of the year. NIM in Singapore and Thailand is expected to remain broadly stable with some upside potential coming from the former due to efforts to reel off some of the lower yielding assets. Muting the upside from more stable NIM, is an increasing deposit competition along with rate cuts in Indonesia, resulting in potentially thinner margins in CIMB Niaga.

Asset quality still intact

Also supporting CIMB’s earnings, going forward, is healthy asset quality. Despite the challenging environment, management reiterated that there has not been any marked deterioration seen in any companies or industries, such as consumer and SMEs, in particular. However, intense scrutiny is in place to monitor the mid-commercial space in Malaysia and Indonesia. At this juncture, the credit charge guidance of 40-50 bps is maintained, with our forecast of 43 bps for FY19 within guidance.

Softer-than-expected domestic corporate loans, expenses to increase

Possible shortfalls are lower-than-expected loan growth and higher operating expenses. Management noted that while consumer (from pickup in mortgage loans, HP and personal loans) and SME loans remained robust, demand for corporate loans had been lacklustre. Also fuelled by rising competition in the mortgage and auto space in Malaysia, along with some chunky corporate repayments during the quarter, management believes that overall loan growth for 2019 could come to the tune of 5-6% vs. its 6-7% target. Overseas, loan growth in Indonesia and Singapore is accelerating modestly while Thailand has been quite stable, with low teen growth levels within reach. Elsewhere, we foresee higher overhead expenses due to one off MSS cost in Indonesia as well as higher overall digital, regulatory and compliance expenses to stymie prospects for stronger earnings.

Valuation and Recommendation

No change to our earnings estimates pending the release of CIMB’s 3QFY19 results next month. Deriving an implied PBV of 0.96x based on the Gordon Growth Model, we maintain CIMB’s TP at RM5.50. We reiterate our BUY recommendation on CIMB. Key upside/downside risks to our fair value include: 1) possible rising asset quality risks in Malaysia 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 - 25 Oct 2019