This article first appeared in The Edge Financial Daily on February 26, 2019

CIMB Group Holdings Bhd
(Feb 25, RM5.84)
Maintain buy with a target price (TP) of RM6.70: We lower our financial year 2019-2020 (estimate) (FY19-20E) net profit forecasts for CIMB Niaga Tbk (Niaga) by 8% respectively to factor in lower net interest margin (NIM) assumptions.

The impact on CIMB Group’s earnings is about -2% and our forecasts for the group are maintained pending the release of its FY18 results on Feb 28.

Positively though, credit costs have come in better-than-expected and should continue to improve, thus providing support to CIMB Niaga’s overall earnings.

CIMB Niaga’s fourth quarter of 2018 (4QFY18) core net profit of 890 billion rupiah (+8% year-on-year [y-o-y] and 0% quarter-on-quarter) took FY18 core net profit to 3.48 trillion rupiah (+17% y-o-y).

The results are within expectations at 96% of our full-year forecast.

FY18 operating profit declined 4% y-o-y as net interest income contracted amid muted loan growth of 2% y-o-y and a 62 basis points (bps) y-o-y compression in NIM.

This negated a 14% y-o-y increase in NIM. Credit costs, however, improved to 163bps in FY18 from 226bps in FY17, to support the 17% y-o-y growth in net profit.

Looking to FY19, the management targets mid-single-digit loan growth of 5% and while it does expect NIM pressure to persist, the goal is to hold the margin above it as long as possible.

As the bank continues to invest in digital initiatives, the expenses are expected to expand at a rate of about 5-6% per annum moving forward. A mitigating factor to these cost pressures is that credit costs are expected to remain stable if not improve, and the target is to take credit costs below 150bps.

Therefore, we are lowering our FY19 and FY20 earnings forecasts for CIMB Niaga by 8% respectively, taking into account lower NIM assumptions (5.09% in FY19 versus 5.12% in FY18). The expected impact on CIMB Group’s earnings is -2% in FY19/20 — our forecasts for CIMB Group are maintained for now. — Maybank IB Research, Feb 21