CIMB Niaga’s FY20 CNP of IDR2.01t (-40% YoY) came within expectations with the poorer performance attributed to heavy loan provisions on Covid-19 economic impact. Management is confident for FY21 to perform better, as economic recovery should translate to better loans growth and credit cost to ease having accounted for the worst in FY20. We keep our Group-level estimates unchanged for now. Maintain MP and TP of RM3.90.

FY20 closed weaker but within range. 92.5%-owned CIMB Niaga (Niaga) reported FY20 core earnings of IDR2.01t, which is in line with expectation (95% of consensus estimate). Typically, Niaga makes up 15-20% of the CIMB Group’s PBT.

YoY, FY20 total income amounted to IDR16.44t (-2%) mainly arising from weaker non-interest income (NOII). Meanwhile, total loans deteriorated by 10% due to the loss of commercial and corporate accounts from Covid-19’s impact to the economy. In lieu of the softer economy and diminishing asset quality, loan impairments soared to IDR5.4t (+69%), driving overall credit cost to 290 bps (from FY19:175 bps) and GIL ratio to 5.0% (+1.2 ppt). Overall, the higher provisioning resulted in FY20 core net earnings of IDR2.01t (-40%) despite CIR improving to 49.5% (from FY19: 51.7%) from leaner business operations. In other notes, CASA-to-deposit grew to 60.3% (+5.0ppt) and LDR dipped to 80.0% (-16.2ppt) as consumers grew more careful with cash and loan demand fell with the decline in business confidence.

QoQ, 4QFY20 total income inched by 2% thanks to net interest income recovery from lower repriced deposits, met by weaker NOII during the period. Impairments remained chunky at IDR1.73t (+8%) as management applies more prudence in anticipation for prolonged economic downturn. However, due to lower effective taxes, 4QFY20 core earnings were lifted to IDR148b (+24%).

Briefing highlights. Niaga’s management presented that they have performed satisfactorily given the shaky economic conditions within Indonesia (R&R loans made up 15% of total loans). Having booked in a more significant provisions in 4QFY20, management believes that Niaga is poised to regain positive traction from the SME and consumer segments, with mortgages still being much in demand and also being the best avenue for cross selling. On the flipside, steadily high CASA levels could benefit the group with cheaper and assessable funds with digitalisation strategies being positioned to enable more efficient customer outreach. Moving into FY21, Niaga’s management offered the following guidance: (i) loan growth of 3-5% (FY20: -10%); (ii) NIM of 4.8-5.0% (FY20: 4.88%); (iii) cost of credit of 2.4-2.6% (FY20: 2.83%); (iv) CIR of <49% (FY20: 48.95%); and (v) ROE of 7-9% (FY20: 5%).

Post Niaga’s results, we leave our earnings for CIMB unchanged for now.

Maintain MARKET PERFORM and TP of RM3.90. Our TP is based on a GGM- derived Fwd. PBV of 0.66x. Although asset quality is still a key risk ahead, we do note that CIMB has been able to bulk up its loan loss reserves while keeping its CET-1 ratio intact (albeit with the help of writing back regulatory reserves and absence of interim dividends).

Risks to our call include: (i) higher/weaker-than-expected NIMs, (ii) stronger/weaker-than-expected NoII, and (iii) lower/higher-than-expected rise in credit charge.

Source: Kenanga Research - 22 Feb 2021