Soft coal prices take toll on CIMB Niaga, BII’s earnings

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KUALA LUMPUR: Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd are facing a challenging operating landscape in Indonesia, no thanks to weakening commodity prices, particularly coal.

And analysts don’t expect any improvement on the horizon soon in Indonesia, a market that is used to be a great impetus for the earnings growth of the two banking giants.

According to analysts, loan growth is expected to be soft in the next few quarters due to uncertainty in the country’s policies, which include a fuel price hike.

The latest third-quarter results ended September of PT Bank CIMB Niaga and PT Bank Internasional Indonesia Tbk (BII), which are owned by CIMB and Maybank respectively, came below analysts’ expectations. The poor performances were partly due to the continued weakness shown in asset quality and a spike in loan provisions.

“Lendings to miners account for quite a sizeable portion of CIMB Niaga’s and BII’s loan portfolios. When the miners’ earnings drop, they would have problem servicing their loans,” said an insurance fund manager, adding that plantation firms might be the next group of clients that might drag down the two banks’ earnings.

In a note yesterday, UOB Kay Hian pointed out that CIMB Niaga, in which CIMB has a 97.94% stake, has taken a more cautious approach in holding back aggressive loan growth earlier than the industry. However, the bank’s non-performing loans (NPL) have suffered a sharper deterioration against that of the industry, with its NPL ratio having increased 112 basis points since December last year to the current 3.35%.

This is compared with the industry’s increase of 54 basis points (bps) to 2.31%.

“Within CIMB Niaga’s portfolio, commodity-related commercial loans continue to plague its asset quality outlook, with gross NPL ratio within its commercial loan segment rising 160bps quarter-on-quarter (q-o-q) to 5.8%,” the research house said.

Again, this is compared with the overall group’s blended NPL ratio uptick of 38bps q-o-q to 3.35%.

“Management had alluded that with the continued weakening coal prices, it expects asset quality deterioration within its mining related portfolio to intensify in the coming quarter and thereby lead to continued increase in provision expectations above the 100bps level,” UOB Kay Hian noted.

RHB Research attributed CIMB Niaga’s 15% q-o-q increase in gross NPL and gross impaired loan ratio, which jumped to 5.4% from 3.9% at the end of the third quarter of 2014, to its exposure to the coal sector that accounted for 5% of its loan book.

In the quarter, CIMB Niaga’s loan-loss provisions spiked 157.8% q-o-q and 78.3% year-on-year.

Kenanga Research in its report yesterday said coal prices had fallen more than 50%, thus affecting the repayment capability of CIMB Niaga customers.

Meanwhile, UOB Kay Hian said CIMB Niaga’s loan growth momentum continues to decline. The annualised loan growth is at only 8.4%, “significantly below the industry’s 15% growth”.

The research house pointed that BII’s weakness in NPL, which saw a spike of 153% in its nine-month provisions, was concentrated within the bank’s corporate structured trade unit and commodity client portfolio in both the oil and gas, and mining sectors.

It said BII — which is 78.98% owned by Maybank — has shut down the corporate structured trade unit and is working on efforts to manage the NPL risk.

This article first appeared in The Edge Financial Daily, on October 31, 2014.