CIMB Group Holdings Bhd
(Oct 31, RM5.03)
Maintain buy with an unchanged target price of RM5.40: CIMB Group Holdings Bhd’s 92.5%-owned Indonesian subsidiary, PT Bank CIMB Niaga Tbk (Niaga) reported an improvement in net profit by 16% quarter-on-quarter (q-o-q) to 760 billion rupiah, (RM244.5 million) in the third quarter of financial year 2016 (3QFY16). 

The nine months of financial year 2016 (9MFY16) net profit of 1.3 trillion rupiah grew by 110.2% year-on-year (y-o-y) against normalised earnings in the same period last year.

9MFY16 operating income saw an improvement of +8.4% to11.1 trillion  rupiah underpinned by higher net interest income (+4.3% y-o-y) and non-interest income (+29% y-o-y).

The improvement in net interest income was contributed by management of interest expense with slower growth of expensive deposits (fixed deposits [FDs] and structured deposits), and stronger momentum in current accounts and savings accounts (Casa) despite a slower loan growth. 

Stronger net operating income was contributed by higher treasury income and improvement in capital market business. Net interest margins (NIM) improved in 3QFY16 by five basis points (bps) q-o-q to 5.7% while for 9MFY16, NIM rose to 5.5% compared with 5.2% in 9MFY15. 

The improvement was contributed by stronger traction in Casa with a growth of 6.1% y-o-y compared with the industry’s 4.3% y-o-y. 

Casa ratio inched higher to 52.6% as at end-September (June: 52%) Meanwhile, growth in expensive deposits (FDs and structured deposits) declined by 12.8% y-o-y. We continue to expect Niaga’s NIM to be compressed ahead. 

This is due to its focus on shorterterm working capital loans to higherquality corporate borrowers and on the premium segment of hire purchase loans with finer margins. 

Loan growth decelerated to -2.7% y-o-y compared to the industry’s 4.8% y-o-y. Consumer loan growth remained flattish, with growth mainly in credit cards and personal loans while auto loans slowed down further with the group tightening its underwriting standards on vehicle financing. Growth in mortgage loans was flattish, contributed by slower property sales in Indonesia. MSME banking loan growth was lacklustre due to slower momentum in small and medium enterprise loans.

Commercial loans registered a -9.5% y-o-y decline, contributed by loan repayments and higher underwriting standards. On corporate loans, growth was modest with focus continuing to be on shorter working capital facilities. Working capital loans comprised 47.3% of Niaga’s total corporate loans as at end-September. 

We expect Niaga’s loan growth to remain below the industry rate ahead due to its conservative strategy. Operating expenditure remained well controlled with a growth of +1.9% y-o-y for 9MFY16. CI ratio improved to 49.8% in 9MFY16 with stronger operating income. 

Provisions have been stable, declining by -0.4% q-o-q contributing to a lower credit cost of 2.6% in 3QFY16. For 9MFY16, provisions declined by 4.9% y-o-y and credit cost was 2.8% (9MFY15: 3%).

We continue to expect provisions to remain elevated in the near term and to gradually improve. The operating environment is likely to improve ahead in Indonesia once the tax amnesty programme and government infrastructure spending effect trickles down to the economy. 

Also, the series of rate cuts in Indonesia will be supportive of lending while the impending corporate tax rate cut is expected to improve business sentiment by assisting businesses which are currently facing challenging operating conditions. 

Niaga wrote off loans in 3QFY16 on some legacy non-performing loans that were related to the transportation and manufacturing sectors. 3QFY16 loan loss coverage saw a drop to 107% from 120.9% in 2QFY16. CIMB Group’s 3QFY16 results are tentatively scheduled to be released on Nov 16. — AmInvestment Research, Oct 31