This article first appeared in The Edge Financial Daily on August 16, 2018

CIMB Group Holdings Bhd
(Aug 15, RM5.88)
Maintain buy with an unchanged target price (TP) of RM7.50: PT Bank CIMB Niaga Tbk’s second quarter ended June 30, 2018 (2QFY18)’s net profit grew by 20.4% year-on-year (y-o-y) and 1.6% quarter-on-quarter (q-o-q). For the first half of financial year 2018 (1HFY18), net profit of 1,768 billion rupiahs (RM495.6 million) was up 28% y-o-y. Overall results were in line with our expectations.

In 2QFY18, lower provision expenses (-33% y-o-y; -17.4% q-o-q; credit cost down 84 basis points [bps] y-o-y to 154bps) were the main driver while for 1HFY18, stronger non-interest income (from foreign exchange income) which rose by 32.6% y-o-y and a 27% y-o-y decline in provisions (credit cost eased by 68bps y-o-y to 167bps) were key earnings drivers. On the other hand, the cost-to-income ratio remains elevated at 49.4% in 1HFY18 while the net interest margin (NIM) remained under pressure (stood at 5.03% in 2QFY18; -7bps q-o-q and -12bps y-o-y). For 1HFY18, the average NIM stood at 5.09%, down 78bps y-o-y arising from the upward repricing of deposit rates.

CIMB Niaga’s loan growth has remained subdued at 3% y-o-y (due to a conscious move to reduce exposure to auto loans). Ex-auto loans, the outstanding loans grew by 5.8% y-o-y driven by corporate and commercial banks loans. CIMB Niaga’s outstanding gross non-performing loans (NPLs) remained flat at 6.3 trillion rupiah on a q-o-q basis and while on a y-o-y basis have declined sharply by 10.2%. The gross NPL ratio saw improvement from the corporate and small and medium enterprise segments, though offset by some rising stress in commercial loans.

Maintain “buy” with an unchanged TP of RM7.50, based on a 1.38 times to the price-to-book value target on calendar year 2019 estimate (CY19E) book value per share (underlying assumptions: FY19E 9.8% return on equity and 8.4% cost of equity). For FY18E, our key assumptions include loan growth at 4% y-o-y, NIM at 2.55%, credit cost at 57bps and cost-to-income ratio of 49%. Downside risks include weaker asset quality and NIM pressure. — Affin Hwang Capital Research, Aug 15