Review

• CIMB’s core net profit climbed 12.2% YoY to RM3,969mn from RM3,538.0mn in 9MFY18. Accounting for around 80% and 82% of ours and consensus forecasts, CIMB’s results are in line with our expectations but slightly above consensus. Meanwhile, the reported net profit - which excludes transformational cost (net of tax) of RM258mn, stood at RM3,711.0mn, accounting for 75% of our forecast. Tracking FY19 targets, annualised ROE stood at 9.7% - ahead of guidance of 9.2% to 9.5%.

• Compared with 9MFY18, reported PBT contracted by 13.9% YoY due to one off gains from the disposal of CPAM and CPIAM amounting to RM928mn last year. Excluding that, CIMB’s underlying operations continued to improve as 9MFY19 net interest income (NII) (including Islamic Banking operations) climbed 5.0% YoY, underpinned by loan growth of 5.6%. While the momentum has softened compared to 2Q, overall loans and advances expanded due to growths in all key segments such as consumer banking (+8.9% YoY) and wholesale banking (+1.8% YoY). Gross loans in commercial banking slipped by 3.0% QoQ and 0.9% YoY due to an increase in repayments during the quarter.

• Excluding FX fluctuations, the increase in loans and advances were underpinned by Thailand (+9.0% YoY), followed by Malaysia (+4.5% YoY) and Indonesia (+4.7% YoY). Loans in Singapore remained weak, contracting by 3.2% YoY. Helping to support NII in 3Q, net interest margin (NIM) broadened by 16 bps QoQ due to the repricing of deposit in Malaysia following the recent OPR cut May. YoY, NIM narrowed to 2.47% in 9MFY19 vs. 2.52% in 9MFY18.

• Compared to loan growth, total deposits expanded at a stronger pace of 7.3%, attributed mostly to a 13.6% YoY increase in consumer banking followed by a 4.4% YoY increase wholesale banking deposits. Meanwhile, deposit balances in commercial banking declined by some 1.1% YoY (- 1.9% QoQ). Despite intense competition in this space, the CASA ratio grew to 34.3% from 32.7% in September 2018.

• Non-interest income (non-NII) (including Islamic Banking operations) accelerated by 12.8% YoY. The improvement was due to stronger trading and FX income, which ballooned from RM1,154mn in 9MFY18 to RM1,548mn in 9MFY19. Capital market activities remained rather lacklustre, resulting in softer fees and commission (+0.8% YoY). Brokerage fees and income from asset management and security services were also lower by 35.6% and 90.9% YoY.

• Operating expenses grew 10.1% YoY (+6.2% QoQ) but mainly from investments and Foward23-related expenses. Management noted that excluding these, core opex rose by 4.9% YoY. Additionally during the quarter, the group incurred transformational cost of RM349mn. In descending order, marketing expenses jumped by 34.2% YoY (+28.1% QoQ), followed by admin & general expenses (+14.4% YoY, +9.3% QoQ). Overall personnel costs climbed 10.8% YoY (+6.9% QoQ). CIMB’s costto-income (CTI) ratio stood at 53.0% (FY18: 52.6%).

• Loan provisions decreased YoY to RM1,033mn vs. RM1,145mn in 9MFY18 from MFRS-related writebacks. Excluding the writebacks, loan loss charge rose to 51 bps, vs. 41 bps in FY18. Management is maintaining loan loss target of between 40 and 50 for FY19. Elsewhere, other headline asset quality indicators also saw some slight deterioration, as the gross impaired loans ratio increased to 3.2% vs. 2.9% in FY18 while the allowance coverage softened to 95% (FY18: 106%).

Impact

• No change to our earnings estimates.

Outlook

• Management noted that the operating environment remains challenging. While CIMB appears to be on track to meet most of its key 2019 targets, we continue to foresee challenges in the operating environment to put pressure on sustaining topline and asset quality performance. Loan growth is expected to fall between 5 and 6%, vs. a target of 6%. Headline asset quality ratio also appears to have weakened slightly with more downside risk envisaged from rising uncertainties due to the global trade conflicts and slower economic growths envisaged in CIMB’s key operating markets, in our view.

• 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

• Tweaking: 1) risk free rate assumption to 3.6% from 4.0% in our Gordon Growth model, and 2) adjusting beta based on changes to data obtained from Bloomberg, we derive a new implied PBV of 1.03x (from 0.96x previously). With that, we raise CIMB’s TP to RM5.90 from RM5.50. We upgrade CIMB to BUY from sell as the potential upside has widened to >12%.

• Key upside/downside risks to our fair value include: 1) softening asset quality risks in key operating markets, 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 Nov 2019