This article first appeared in The Edge Financial Daily on August 19, 2019

CIMB Group Holdings Bhd
(Aug 16, RM5.07)
Maintain buy with an unchanged target price (TP) of RM6.80: The first half of financial year 2019 (1HFY19) net profit for CIMB Group Holdings Bhd’s CIMB Niaga grew by 11.8% year-on-year (y-o-y). The main driver was lower provisions and strong net interest income (NII) growth in second quarter of FY19 (2QFY19).

Net income in 1HFY19 grew 5.7% y-o-y contributed by strong NII growth in 2QFY19 where it expanded 10.9% y-o-y. This was the result of net interest margin improving by 50 basis points y-o-y in the quarter to 5.53% as CIMB Niaga was able to reprice its loans higher. Meanwhile, 2QFY19 non-interest income (NOII) also grew strongly at +8.9% y-o-y causing 1HFY19 NOII to expand 6.3% y-o-y.

Growth in arranger and syndication fees (+96.6% y-o-y to 173 billion rupiah [RM50.99 million]) and foreign exchange and fixed income derivatives (+34.9% y-o-y to 526 billion rupiah) were the main attributors.

Overall gross non-performing loan (NPL) ratio came in at 2.87% as at 2QFY19, compared with 3.04% as at 1QFY19 and 3.39% as at 2QFY18. Improvements came from the commercial and consumer segment. However, we noted that there was an uptick in gross NPL ratio (from 1.1% as at 2QFY18 to 1.8% as at 2QFY19) for the corporate segment. We understand that this was due to one particular account. Nevertheless, this had not made a dent to the overall asset quality.

Loan book rose 2.6% y-o-y to 190.54 trillion rupiah. It was supported by strong expansion in consumer loans where it grew 6.7% y-o-y to 51.11 trillion rupiah. Drilling further, mortgages and credit cards see double-digit growth at 13.5% y-o-y to 31.75 trillion rupiah and 10% y-o-y to 8.94 trillion rupiah respectively. Meanwhile, corporate banking saw its loan book rising 2.1% y-o-y to 71.4 trillion rupiah.

Deposits grew 4% y-o-y to 197.85 trillion rupiah. However, it was led by time and structured deposits which grew 9.3% y-o-y to 91.22 trillion rupiah. This resulted in interest expense growth moderating NII growth.

We make no changes to our forecast pending the group’s 2QFY19 result later this month.

The improvement in CIMB Niaga’s 1HFY19 was as we had expected. We believe that we could see further improvement in 2HFY19 with consumer and small and medium-sized enterprise segments the main key area of focus for FY19. Also, its digital propositions have started to make an impact. We opine that the continuing asset quality improvement in Indonesia will continue to boost CIMB Niaga’s income resulting in more sustainable earnings growth.

Overall, we believe that CIMB Niaga will provide a strong supporting role to the group’s earnings this year. We maintain our “buy” recommendation with unchanged TP of RM6.80 based on pegging its FY20 book value per share at price-to-book value multiple of 1.2 times. — MIDF Research, Aug 16