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This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.  

 

CIMB-Niaga_Table_Graph_24_TEM1079_theedgemarketsTHERE is growing concern among the investment fraternity that bad loans could continue to creep up at CIMB Group Holdings Bhd’s Indonesian bank, PT Bank CIMB Niaga Tbk, and spread to other industry segments as the economy there continues to lose steam.

Like most Indonesian banks, CIMB Niaga, the country’s fifth largest by assets, has seen a deterioration in asset quality over the last several quarters. The deterioration, however, has largely been isolated to its coal and coal-related loans, which account for less than 4% of its overall loan base.

“With no near-term visible signs of a recovery (in the economy), we believe the contagion effect could spread to its SME [small and medium enterprise] and other commercial loans, which represent 34% of CIMB Niaga’s loan base,” UOB Kay Hian Research says in an Oct 5 report on CIMB Group.

CIMB Niaga’s gross non-performing loan (NPL) ratio worsened to 4.28% as at June 30 from 2.97% a year ago, and is higher than the industry’s average of 2.7%.

The lender is due to announce its third-quarter results for the financial year ending Dec 31, 2015 (FY2015) at the end of this month. Analysts will be keeping a close watch on whether there is an uptick in its special mention loans, or loans overdue by up to 90 days but yet to turn bad. Special mention loans were already up by 6% in 2QFY2015 on a quarter-on-quarter basis.

It is understood that more than half of CIMB Niaga’s loan book is commodity and commodity-related, and with the continued slump in global commodity prices, new NPLs are likely to emerge.

CIMB Niaga’s net profit in the first half of the year plunged by 91% to IDR176 billion (RM53.7 million) because of a 391% increase in provision expenses (IDR2.78 trillion). It has indicated to analysts that provisions in the second half will be lower than the first but will nevertheless remain at “elevated” levels.

“With growing economic headwinds in Indonesia, the drop in provisions in the second half is likely to be much less significant that what they initially expected. Provisions may have already peaked, but they will not go back to normal levels anytime soon,” says a banking analyst.

Last Wednesday, in a bid to boost the economy that has been growing at its slowest pace since 2009, caused by a collapse in commodity prices even as the rupiah trades at 17-year lows against the US dollar, the Indonesian government announced its third round of stimulus measures in a month.

The latest measures, which include cuts in fuel prices and electricity tariffs for the industrial sector, were aimed at reducing costs for businesses. They follow from earlier measures focused on cutting bureaucracy and streamlining regulations.

Some economists speculate there may be a fourth set of stimulus measures later this month.

“We believe the (recent) measures will boost sentiment but given the lack of external demand and slowdown in China’s growth, (Indonesia’s) near-term growth outlook will likely remain weak,” UOB Global Economics & Markets Research comments in an Oct 8 report on the economy.

It retains its forecast that Indonesia’s GDP growth will improve only marginally to 4.8% in the second half of the year from 4.7% in the first half. Second-quarter GDP grew 4.67%, its slowest in six years. The central bank’s next monetary policy meeting is on Oct 15, but the key interest rate is largely expected to remain unchanged.

“Introducing stimulus measures is one thing, but implementing them is another. What we’ve seen with Indonesia is that execution is slow, so these measures aren’t likely to filter through to the economy this year, for sure. For the banking system, asset quality will continue to deteriorate,” a banking analyst tells The Edge.

JPMorgan, in a report on Asean banks on Oct 7, says Indonesian banks are facing a credit cycle at a point when structural challenges are on the rise. “We expect asset quality to deteriorate and forecast peak NPLs of 5.6% in the next two years from 2.6% now,” it says.

Some industry observers say that one of the reasons CIMB Niaga’s NPL ratio has been higher than the industry’s is that, unlike other domestic lenders, it followed a different accounting standard that is stricter in the treatment of doubtful debts.

“The FRS 139 accounting standard forced it to make provisions much earlier than the local banks did. As local banks start fully adopting that standard, you’ll see their provisions going up. But for CIMB Niaga, because it started early, the worst is likely over,” says one.

Last year was the first time in six years that CIMB Niaga’s net profit fell on a y-o-y basis. Its impaired loans jumped by 40% in 1H2015, accounting for close to 93% of CIMB Group’s gross impaired loan increase in that period.

Analysts are keeping a close watch on CIMB Niaga’s performance, as it accounts for a substantial portion of CIMB Group’s earnings. Last year, it accounted for just 19% of CIMB Group’s earnings, compared with about 30% in previous years.

It has become a key sticking point in CIMB Group’s (fundamental: 1.05; valuation: 1.65) growth outlook.

Malayan Banking Bhd (Maybank)’s Indonesian subsidiary, PT Bank Internasional Indonesia Tbk, too has been affected by the slowing macro environment; however, the impact on Maybank is less significant as the Indonesian operation accounts for only about 5% of its earnings.

UOB Kay Hian, in its report last week, said it was taking a more cautious view of CIMB Niaga’s growth and recovery outlook. It now expects CIMB Group’s net profit to come in at about 8% below a consensus net profit forecast of RM3.4 billion in FY2015, and 14% below consensus expectations of RM4.2 billion in FY2016.

“We forecast (CIMB Group’s) absolute NPL to surge 94% from FY2014 to FY2017 (Indonesia: +187%, Thailand: +45%, Malaysia: +30%) with gross impaired loans to peak at 4.75% in 2017 from 3.09% in 2014. As such, we expect group credit cost to remain elevated at 80-85 basis points over the next two years versus our original assumption of 65-70 basis points,” says UOB Kay Hian.

Analysts have also voiced concern about the adequacy of CIMB Group’s capital levels. Its Common Equity Tier 1 (CET-1) ratio dropped to 9.7% as at end-June from 10.1% in December, the lowest among the big banking groups, due to the high loan provisioning required for Indonesia as well as its restructuring costs.

“There have been some concerns that the group’s current fully loaded CET-1 of 9.7% versus some of its larger domestic banking peers’ average of above 10% may be deemed to be insufficient to weather the potential asset quality, currency and overall earnings volatility from its regional operations, especially in Indonesia,” UOB Kay Hian says.

However, the research house said that in its latest discussion with CIMB Group’s management, the latter did not indicate any immediate equity capital-raising plans. The group is monitoring the macro and currency developments in Indonesia closely.

Bloomberg data shows that of 25 analysts who track the stock, 12 of them have a “hold” call, while seven have a “buy” and the rest, a “sell”. The average 12-month target for the stock is RM5.52.

Last Wednesday, the stock surged 31 sen to RM4.90, buoyed by improved market sentiment as the ringgit saw its biggest one-day gain in 17 years against the US dollar.

Investors chased up the stock, deemed cheap compared with its peers after it hit an over five-year low of RM4.46 on Sept 30, despite Moody’s Investors Service having downgraded CIMB Bank’s baseline credit assessment (BCA) and adjusted BCA to “baa2” from “baa1”, a day earlier. CIMB Bank is the group’s consumer bank.

“The downgrade ... reflects the bank’s weaker capitalisation compared to its domestic and regional peers, as well as Moody's expectation that further pressure on asset quality from slowing operating conditions will weaken the bank’s profitability and ability to improve its capital levels,” Moody’s said.

CIMB Group closed two sen higher at RM4.92 last Thursday.

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