This article first appeared in The Edge Financial Daily, on October 22, 2015.

CIMB Group Holdings Bhd
(Oct 21, RM4.97)
Maintain neutral with an unchanged target price (TP) of RM5.70: CIMB Thai Bank Public Co Ltd (CIMB Thai) third quarter of financial year 2015 (3QFY15) saw a sequential improvement in net profits, with the current 498.4 million baht (RM60.14 million) more than double that of 2QFY15’s 217.5 million baht.

For the cumulative nine months (9MFY15), its net profit declined 6% year-on-year (y-o-y) however, owing to a 105.4% spike in provisions due to the weaker economic climate.

CIMB Thai’s consolidated operating income rose 19.9% y-o-y, largely due to dividend income, trading gains, foreign exchange transactions and gains on investments.

Net fee and service income was up 20.3% y-o-y, contributed by healthier mutual fund fees and insurance premiums.

Core banking net interest income rose 6.5% due to a modest loans expansion. Cost-to-income ratio held steady at 57.3% as at September 2015 versus 67.3% a year ago.

Net interest margin improved further to 3.16% versus 2QFY15’s 3.05% as lower cost of funds helped stem the recent slides.

Loans growth was decent, expanding 4.8% to 199.9 billion baht from Dec 31, 2014.

Deposit growth remained muted, up by only 2.7% in the same period to 217.5 billion baht, resulting in a modified loan-to-deposit ratio of 91.9%.

Gross non-performing loans saw no respite, rising to 8.6 billion baht, translating to a ratio of 4.3%. 

Slower repayments from a few of its corporate clients underscored the weakness. Loan loss coverage ratio weakened to 89.2%. That said, total provisions stood at 7.6 billion baht, an excess of 2.5 billion baht over regulatory requirements.

With conditions not likely to improve significantly anytime soon, we do not anticipate a major turnaround in the Thai operations in the near term.

Credit expansion is decent, but delinquency levels are also on the rise, highlighting the still-challenging environment.

While a dampener, CIMB Thai’s contributions to the group at large remain small at not more than 3% at this juncture, hence the effects of these numbers being relatively muted.

With the group still embarking on recalibrating itself for greater growth from 2018, and hence giving rise to potential near-term earnings volatilities, our neutral call and TP remain unchanged. — Public Investment Bank Research, Oct 21