This article first appeared in The Edge Financial Daily on November 2, 2018

CIMB Group Holdings Bhd
(Nov 1, RM5.70)
Maintain outperform with an unchanged target price (TP) of RM6.50: Improvement in asset quality made more telling contributions to PT Bank CIMB Niaga Tbk’s year-to-date (YTD) numbers, with nine months of financial year 2018 (9MFY18) pre-tax profit of 3.63 trillion rupiahs (RM1 billion) (+23.2%) aided by a 23.6% year-on-year (y-o-y) growth in non-interest income (recoveries, +84.6% y-o-y) and a 26.8% y-o-y decline in provisions. Net interest margin (NIM) improved quarter-on-quarter (q-o-q) due to loan repricings and average current and saving accounts (Casa) growth, though falling on an annualised basis from liabilities rate adjustments and stiffer competition. While Indonesia is proving to be the group’s biggest challenge at the moment, much of this pain stems from external factors. Management is confident that it is a lot more prepared and will be able to ride out this period better. We are encouraged by the continued operational improvements seen, and remain optimistic about the group’s longer-term prospects, pockets of near-term challenges notwithstanding.

Operating income for 9MFY18 was 1.6% higher y-o-y, driven primarily by non-interest income growth (+23.6%). Net interest income was down 3.8% y-o-y during the period as margins compressed sharply, though largely within expectations. Loan recovery (+84.6% y-o-y) and foreign exchange-related (+42.7%) income were still major contributors as momentum in other traditional fee-based income slowed.

NIM has been holding steady at around 5.10% on a YTD annualised basis over the last three quarters, a level which management has said it is confident in maintaining despite intense competitive pressures on both the asset and liability fronts. The cumulative 150-basis-point rate hikes have not been fully transmitted to its loan repricings, hence further upticks in the offing. Casa ratio is at a healthy 53.25%, down slightly from 56.12% in 2QFY18.

Loan growth continues to be tepid (+2.2% y-o-y) with the auto segment still shrinking (-32.8% y-o-y) as a result of the group’s portfolio rebalancing. The near-to-midterm outlook is not encouraging as the slumping rupiah has also sapped confidence while the forthcoming presidential election has stifled activity, both conspiring to hamper loan growth. The current year target of mid-single-digit growth is at risk and will depend largely on corporate activity and potential infrastructure-related drawdowns in the final quarter of the year.

Asset quality indicators continue to improve on an overall basis, though mixed by segment. Gross impaired loan and gross non-performing loan ratios are 4.33% (2QFY18: 4.36%) and 3.41% (2QFY18: 3.39%). Of some encouragement however is its commercial segment finally seeing a reduction in new formations while special mention loans are also on a downtrend. — PublicInvest Research, Nov 1