This article first appeared in The Edge Financial Daily on April 25, 2017

CIMB Group Holdings Bhd
(April 21, RM5.61)
Maintain market perform with an unchanged target price of RM5.55: CIMB Thai’s three-month period financial year 2017 (3MFY17) earnings of 121 million baht (RM15.49 million) (-63% year-on-year [y-o-y]) was below consensus expectation of a 1.9 billion baht net profit. Earnings was dragged down by fee-based income falling drastically (-33% y-o-y) mitigated by a moderate rise in fund-based income (+3%). Lower gains from forex and trading (-79% y-o-y) and investment (-99%) dragged down the overall performance of fee-based income. The modest gain (+3% y-o-y) in fund-based income was driven by improved net interest margin (NIMs) by nine basis points (bps) to 3.7% due to efficient funding cost management as net loans declined by 1% y-o-y.

Strong deposit growth of 15% versus declining loans (-1%) pushed net loan deposit ratio (LDR) lower by 17 percentage points (ppts) to 106%. Cost to Income ratio surged by another 3ppts to 58% due to dismal top line declining faster than operating expenditure (-0.5% y-o-y) which was outpaced by top-line growth of 6%.

Y-o-y saw further deterioration in asset quality with impairment allowances up by (+7% y-o-y) attributed to higher non-performing loan (NPL) by 3ppts to 6.3%. The rise in provisions saw credit costs ticked up by 8bps to 2.34%. Loan loss coverage ratio fell by 24ppts due to the surge in NPL y-o-y. Capital ratios improved y-o-y as Tier-1 capital and total capital improved 30bps and 170bps to 11.1% and 16.7%, respectively.

We still view that CIMB Thai will be able to turn positive for FY17, with lower provisions given that loan loss provisioning is expected to peak by then. Profitability will be supported by write-backs as corporate cash flows improved due to the expected stable economy. We are cautious about its target of 5% to 10% loan growth (versus 3.7% in FY16) given the slow moving Thai economy with the Bank of Thailand maintaining its interest rates at 1.5% to spur growth. We believe a mid-single-digit growth is achievable on the back of stable and low interest rates (+1.5%), low inflation with government spending and tourism expected to support the sluggish economy in 2017. Profitability will be driven by stable NIMs as the banking industry toned down deposit mobilisation to ease their worries over NIM, while the excess liquidity in the banking system is supporting the bank’s objective to refrain from chasing deposits. — CIMB Research, April 21