This article first appeared in The Edge Financial Daily on November 30, 2017

CIMB Group Holdings Bhd
(Nov 29, RM5.94)
Maintain outperform with a lower target price (TP) of RM6.75: Nine months of financial year 2017 (9MFY17) core net profit (CNP) of RM3.415 billion is above our expectations and in line with consensus expectations accounting for 84% and 77% respectively of full-year estimates.

The better-than-expected performance was driven by Islamic banking income which grew by 19% year-on-year [y-o-y] (versus our expectations of a slight dip of 2%). The rest was within our expectations with loans at about 7%, cost to income ratio <52%, and credit costs of about 65 basis points (bps).

9MFY17 CNP of RM3.415 billion grew 33% underpinned by top- line growth of 9%, falling impairment allowances by 2%, and lower tax rate by two percentage points to 23%. Top line was supported by broad-based growth of fund-based income (+10%), Islamic banking income (+19%) and fee-based income (+16%).

Earnings were also supported by higher loans coupled with better net interest margin (NIM) of 9bps (versus our expectation of 1bps compression and guidance of 5bps to 10bps compression) and lower credit costs by 6bps to 0.68%.

Quarter-on-quarter, third quarter (3QFY17) CNP growth of 3% was driven by top line of 2%, and lower impairment allowances by 1%. Top line was moderate due to fund-based income falling by 3% but mitigated by fee-based income of 15%. Fall in top line was exacerbated by soft loans (1%) and fall in NIM by 14bps to 2.6% partly due to falling average lending yields with an increase in mortgage lending. As impairment allowances fell, credit cost also fell by 5bps to 0.74%.

We are encouraged by the strong loans growth (exceeding target with domestic loans growing stronger than industry) and optimistic about the group achieving its target on the back of sustainable capital market activities, better-than-expected Islamic banking income and resolute loans with the absence of the high provisions seen in FY16.

Management revised its guidance for flattish NIM going forward attributed to soft deposit-taking as credit demand is not robust. The soft deposit-taking saw benign competition for deposits; thus, there is no added pressure on cost of funds. Strong current account, savings account growth from transactional banking is an added advantage in mitigating funding costs pressure.

A further plus point in stable NIMs with the group’s net stable funding ratio (NSFR) at about 100% with added advantage of Thailand and Indonesia’s NSFRs above 100%.

Post results, changes are made to our FY17E (estimate)/FY18E where we revised slightly by +6%/+2% to RM4.326 billion/RM4.583 billion as we input in better performance from Islamic banking by +18%/18% y-o-y (from -2% for FY17) for FY17E/FY18E.

While issues on asset quality are receding, other challenging headwinds such as moderate loans growth and pressure on credit costs still prevail. Our GGM-TP (Gordon growth model) of RM6.75 valuations are based on its five-year average price-to-book value (P/BV) of 1.23 times (previously 1.27 times) where we utilised cost of equity of 7.4% (7.6% previously), FY18 returns on equity of 8.4% (from 8.9%), and terminal growth of 2.5% (unchanged).

At 1.23 times P/BV, this implies a 0.2 SD (standard deviation) below mean on concerns of MFRS9 going forward. TP is now lowered to RM6.75 but with potential total returns still looking attractive at about 17%. We maintain our “outperform” call. — Kenanga Research, Nov 29