This article first appeared in The Edge Financial Daily on January 25, 2019
CIMB Group Holdings Bhd
(Jan 24, RM5.65)
Maintain hold with an unchanged target price (TP) of RM6.10: After a meeting with management, we are of the view that CIMB Group Holdings Bhd’s fourth quarter of financial year 2018 (4QFY18) results may not be exciting due to weaker net interest income and non-interest income generation, although provisions are improving (credit cost ~50 basis points [bps]).
Meanwhile, 4QFY18 net interest margin (NIM) is expected to remain under pressure arising from weaknesses in Indonesia. We see a modest outlook for CIMB in FY19 estimate (FY19E) (core net profit growth +2.2% year-on-year [y-o-y]; core earnings per share -1.1% y-o-y), consistent with our macro view that confidence and business expectation remain cautious. Overall, the Malaysian operations will remain the key earnings driver of the group in FY19, but we do not discount the likelihood of rate hikes by the Bank of Indonesia, which is a dampener on CIMB Niaga’s short-term NIM.
We are projecting a 4QFY18 net profit of circa RM1.1 billion for CIMB, and a FY18 normalised net profit of circa RM4.6 billion, which is likely to fall within Affin’s and consensus estimates.
CIMB is expected to see a shortfall in both 4QFY18 and FY18 net interest and non-interest income. CIMB Niaga will likely see a NIM compression in 4QFY18 (from 5.17% in 3QFY18) arising from the rate hike in November 2018, with FY18’s NIM estimated to be circa 50bps-60bps lower y-o-y to 5.1%-5%. Non-interest income will also likely see a decline (y-o-y and q-o-q) in 4QFY18, largely due to the poor performance of the treasury and markets division in Malaysia. To recap, the group also saw weaker non-interest income in 2QFY18, due to the heavy selldown of the Malaysian market after the 14th general election.
Though there was some drawdown for corporate loans in Malaysia in 4QFY18 (mostly working capital lines), we understand from management that this was more likely pent-up demand in FY18 and is not an indicator of a broad-based capacity expansion in FY19. The group, which saw fairly robust growth in Malaysia’s residential mortgages in FY18, may potentially see growth momentum tapering off in FY19.
According to management, the group is likely to meet its FY18 loan growth key performance indicator (KPI) of 6% as the Malaysian loan book continued to outgrow the industry. For year-to-date nine months of FY18 (9MFY18), Malaysia’s loan growth (y-o-y) stood at 7.6%, Indonesia at -1.3%, Singapore at 14.5%, and Thailand (FY18) at 5.2%.
As deposit rates reprice ahead of financing rates in Indonesia, CIMB Niaga suffered from a severe NIM compression throughout 9MFY18, amounting to -62bps from 5.74% (9MFY17) to 5.12% (9MFY18) subsequent to six rate hikes totalling 175bps. A potential slowdown in the Indonesia’s rate hikes in 2019 will augur well for CIMB Niaga’s net interest income as it will gradually see the positive repricing impact of its loan book. Nonetheless, the Indonesia central bank had reasserted that it would act to defend its exchange rate when needed through tightening initiatives in 2019.
We maintain our “hold” with a TP of RM6.10, based on a 1.14 times price-to-book value target on calendar year 2019 estimate book value per share (based on FY19E 9.3% return on equity and 8.8% cost of equity). No revisions in our CIMB forecasts. For now, our FY19E key assumptions include loan growth at 4.2% y-o-y, NIM at 2.45%, credit cost at 53bps and cost-to-income ratio of 51%. Downside risks are deterioration in asset quality, higher overheads and weaker investment results. Upside risks are macro improvement and stronger loan growth. — Affin Hwang Capital Research, Jan 24