This article first appeared in The Edge Financial Daily on January 17, 2019

CIMB Group Holdings Bhd
(Jan 16, RM5.65)
Maintain hold with an unchanged fair value (FV) of RM6.30: CIMB Group Holdings’ 93.7%-owned subsidiary, CIMB Thai, released its fourth quarter of financial year 2018 (4QFY18) results with a net loss of 530 million baht (RM68.73 million) compared with a net profit of 177 million baht in 3QFY18.

This was largely due to higher operating expenses and increase in provisions for losses. We understand that the Bank of Thailand has directed banks to raise provisions prior to the implementation of the Financial Reporting Standard (FRS) 9.

This is to smoothen the impact for the implementation of the FRS 9 for Thai banks in 2020.

The increase in provisions will have an impact only at CIMB Thai’s level. It will not have any impact on the financials of the group on a consolidated basis. Recall, domestically, the FRS 9 has been already been implemented.

For cumulative 12 months of financial year 2018 (12MFY18), net profit was seven million baht. Earnings fell by 98.2% year-on-year (y-o-y) attributed to higher operational expenditure and provisions despite a modest growth in total income.

CIMB Thai’s provisions declined by 2.6% y-o-y to 4.9 billion baht for 12MFY18 despite a significant increase in allowances for losses in 4QFY18. Credit cost for CIMB Thai improved to 2.09% for 12MFY18 versus 2.36% in 12MFY17.

CIMB Thai’s non-performing loan (NPL) ratio fell to 4.3% in 4QFY18 versus 5.7% in 3QFY18 owing to the sale of a mixed portfolio of NPLs which resulted in a gain of RM226.3 million in the quarter.

Correspondingly, the Thai subsidiary’s loan loss cover improved to 107%. Loan-to-deposit ratio (LDR) for CIMB Thai rose slightly to 127.2% in 4QFY18 versus 123.4% in 3QFY18 due to a stronger loan growth while its modified LDR climbed to 97.2%.

Gross loan growth for the Thai subsidiary accelerated to 7.7% y-o-y in 4QFY18 versus 5.8% y-o-y in 3QFY18. On a quarter-on-quarter basis, CIMB Thai’s loans on gross basis grew 3.7%.

Net interest margin (NIM) contracted 18 basis points (bps) y-o-y to 3.71% in 12MFY18 due to lower asset yield.

On Dec 19, 2018, Bank of Thailand raised interest rates by 0.25% to 1.75%.

This is expected to have a slight positive impact on CIMB Thai’s NIM moving into 1QFY19 as lending rates will be repriced ahead of deposits. Generally, the term structure of deposits is shorter in Thailand than Malaysia.

We are expecting interest rates in Thailand to be unchanged moving forward despite market expectation of another rate hike of 25bps in 2019.

We maintain our “hold” recommendation on CIMB Group with an unchanged FV of RM6.30 per share. Our FV is based on FY19 price-to-book value of 1.1 times, supported by a return on equity of 9.7%. Our earnings estimates are unchanged. — AmInvestment Bank, Jan 16