CIMB Group Holdings Bhd
(Oct 23, RM6.40)
Maintain neutral with unchanged target price of RM7.27: CIMB Thai’s net profit for the nine months ended September (9MFY14) slipped 6.3% year-on-year (y-o-y), impacted primarily by the weak economic conditions prevalent in the country.

Provisions rose 67.4% y-o-y, while there was also a 16.8% increase in operating expenses owing to a hike in employee costs and product-related expenses.  While CIMB Thai’s numbers continue to point toward a slow period going forward, we do not see this as chronic, it will reverse course once the economic situation improves.

The persistent weakness in CIMB Group’s current share price stems from the uncertainties surrounding its proposed mega merger (more so recently after the Employees Provident Fund was disallowed from voting in the deal), coupled with its high foreign shareholding content.

CIMB Thai’s cumulative operating income was up 21.2% y-o-y, driven by net interest income growth of 22.6% underpinned by healthy loan expansion and an early redemption of hybrid instruments.  Net fee and service income growth of 9.5% came about as a result of higher advisory fees and fees from insurance premiums. Treasury-related income was particularly robust, with a 236.2% gain on trading and foreign exchange transactions and a 89.9% gain in investments. Loans expanded 6.9% year-to-date while deposits saw a 3.7% increase, resulting in a loan-to-deposit ratio of 93.1%.

Net interest margin improved a notch to 3.36%, commendable in light of intense competitive pressures in both the deposit and loan markets, on account of better controls on the cost of funds.  Asset quality weakened again after the recent quarters’ reprieve, as gross non-performing loans inched higher to 3.3%, impacted by the weak economic climate which affected repayment capabilities.  — PublicInvest Research, Oct 23

This article first appeared in The Edge Financial Daily, on October 24, 2014.