This article first appeared in The Edge Financial Daily on November 2, 2017

CIMB Group Holdings Bhd
(Nov 1, RM6.14)
Maintain neutral with an unchanged target price (TP) of RM6.40 per share: The steady recovery of CIMB Group Holdings Bhd’s Indonesian operations PT Bank CIMB Niaga Tbk continues afoot with another set of encouraging financial numbers reported for the quarter, with the first nine months of financial year 2017 (9MFY17) net profit of 2.2 trillion rupiah (RM700 million), (+69.1% year-on-year [y-o-y]) coming on the back of net interest income (NII) [+5.4% y-o-y] growth and a decline in provisions (-16.4% y-o-y). This comes despite a sharp quarter-on-quarter drop in net interest margins (NIMs) as a result of the two rate cuts by Bank Indonesia (BI) during the quarter. Asset quality management will be a major priority at this juncture in view of the soft economic conditions, reflected by its tepid loans growth. We are encouraged by the improvements seen in Indonesia, albeit only gradually. That said, we continue to see the progress made by the group pursuant to its target 2018 makeover largely priced-in at this point. Our “neutral” call and RM6.40 TP are maintained.  

9MFY17 operating income was 5.1% higher y-o-y, contributed by a 5.4% gain in NII (aided by a 16.5% y-o-y decline in interest expense) and 3.6% gain in non-interest income (aided by a 32.4% y-o-y gain in bancassurance income).

NIMs fell a sharp 55 basis points during the quarter to 5.5% largely as a result of the two unexpected rate cuts by BI which necessitated repricings. Management cautioned for a continued slippage towards 5% on the back of competitive pressures and further repricing effects amid a deliberate focus on asset quality management.

On loans growth, the small and medium enterprise segment is the key growth driver, reflected by its 7.5% y-o-y expansion. The consumer book shrank 6.2% y-o-y, impacted largely by the auto segment’s (-38.9% y-o-y) continued shrinkage though partly mitigated by a 12.1% y-o-y growth in the mortgage loans segment. Overall loans growth is an uninspiring 2.7% y-o-y. A welcome plus point is the improvement in its asset quality. While gross impaired loan and gross non-performing loan ratios are slightly higher at 5.24% (second quarter of FY17 [2QFY17]: 5.01%) and 3.95% (2QFY17: 3.89%) respectively, we gather this is a result of management’s prudent move in light of potential challenges. Importantly, special mention loans are lower at 6.01% (2QFY17: 7.17%), while loan loss coverage is now higher at 115.07% (2QFY17: 109.3%). — PublicInvest Research, Nov 1