HIGHEST GROWTH IN PROFIT AFTER TAX OVER THREE YEARS: FINANCIAL SERVICES — RM10 BILLION TO RM40 BILLION MARKET CAPITALISATION: CIMB Group Holdings Bhd - Rising Again

This article first appeared in The Edge Malaysia Weekly, on December 17, 2018 - December 23, 2018.
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It has been a tough few years for CIMB Group Holdings Bhd as asset quality issues at its Indonesian subsidiary, among other challenges, took a toll on earnings. But it has since emerged stronger and leaner.

The Asean-focused banking group’s net profit fell for two consecutive years after hitting a record high in its financial year ended Dec 31, 2013 (FY2013), mainly because of the heavy loan loss provisions required for PT Bank CIMB Niaga Tbk. A slump in global commodity prices had affected the latter’s coal and coal-related loans in particular.

However, in FY2016, CIMB Group bounced back with a 25% year-on-year jump in net profit to RM3.56 billion, on record revenue of RM16.06 billion, as the Indonesian lender improved. In FY2017, it notched up a further 25.6% growth in net profit to RM4.48 billion — just shy of its record high of RM4.54 billion in FY2013 — as overall provisions declined 7% y-o-y and its Thai lender returned to profitability.

Between FY2014 and FY2017, net profit saw a 13% three-year compound annual growth rate — the highest among its peers in the Financial Services (RM10 billion and above market capitalisation) sector.

While headwinds remain for CIMB Group on several fronts — notably, weaker capital markets that are affecting its non-interest income and margin pressures in Indonesia — analysts have a more positive outlook as they believe the worst is over.

Recall that the group has, as part of its “T18” strategy that it unveiled in February 2015, undergone a business reorganisation, cut its workforce substantially to slash costs and enhance efficiency, and disposed of non-core assets.

In July 2015, it cut 11.1% of its headcount in Malaysia and Indonesia under a mutual separation scheme, while in December 2016, it sold its 18.2% stake in a Chinese lender for RM972 million. It continued to sell more assets this year.

Net profit in the first nine months of FY2018 jumped 30.8% to a record RM4.47 billion, boosted by a one-off gain of RM928 million from paring down its stakes in two asset management joint ventures, and another gain of RM163 million from selling a 50% stake in its international stockbroking business, CIMB Securities International.

On a business-as-usual basis, net profit grew 3.6% to RM3.54 billion, helped by lower operating expenses and a 30.7% drop in loan loss provisions. There was growth in all segments except wholesale banking.

There has been gradual improvement in its underlying operations, with loan growth gaining pace and net interest margin stabilising. Loans grew 4.8% year on year while NIM inched up one basis point to 2.49% from the preceding quarter.

Its gross impaired loans ratio moved down to 3.1% as at end-September from 3.5% a year ago, while cost-to-income ratio (CIR) — among the highest in the industry back in 2014 —  has improved substantially over the years to about 52%.  Annualised return on equity stood at 9.8%.

CIMB  looks to be on track to achieving its key T18 targets by the year end, apart from an ROE-related one. It  will likely miss its  10.5% ROE target, but this has been well-flagged and is already priced into its share price performance, RHB Research opines.

Group CEO Tengku Datuk Seri Zafrul Aziz  is  cautious about the group’s prospects despite the positive performance. “We remain cautious amid weaker regional economies and global trade tensions. Against this backdrop, we will continue to control asset quality and cost across all businesses and geographies, while we finalise our next mid-term plan to propel the group onto a stronger growth trajectory,” he said.

The group is moving forward with some changes at the top. In September, chairman and former CEO Datuk Seri Nazir Razak stepped down and  has since been replaced by Datuk Mohd Nasir Ahmad. And last month, there was a management reshuffle along with some new appointments.

At the time of writing, Bloomberg data showed 11 analysts had a “buy” call on it and 13, a “hold”. There were no “sell” recommendations. Target prices ranged from RM5.40 to RM7.75, with the 12-month average at 6.39. The counter closed at RM5.65 on Dec 10.