CIMB Group Holdings (CIMB MK, BUY, FV: RM8.53, Last Price: RM7.42)

The group’s 97.9%-owned subsidiary CIMB Niaga reported full-year earnings that were in line with estimates. 1QFY12 earnings rose 29% y-o-y and 18% q-o-q largely due to lumpy trading gains, improvement in NIMs, but  this was  partially offset by higher provisions. The key takeaways include a positive stabilization in NIM but a negative deposit growth lag that could slightly dampen the loan growth outlook. Maintain BUY at an unchanged FV of RM8.53 (2.3x P/BV, 16.7% ROE). 

CIMB Niaga – selective growth. CIMB Niaga reported strong 1QFY12 earnings growth of 29% y-o-y and 18% q-o-q. Annualized results were ahead of expectations by 31%. However, the results were bolstered by a lumpy  IDR300bn in treasury trading income which helped drive a 75% q-o-q and 69% y-o-y increase in non-interest income. Adjusting for the exceptional gain which may not be repeated in the ensuing quarters, annualized 1Q12 results was largely in line with expectations.

Taking the opportunity to build in provision buffers. Despite NPLs remaining relatively benign with the NPL ratio inching up a marginal 5bps to 2.69%, the group took the opportunity of the strong non-interest income generation in 1Q12 to raise provision buffers with impaired loans coverage ratios rising from 75.3% to 83.9% in 1Q12. Loans loss provision increased 93% q-o-q and 99% y-o-y as a result of the more conservative pre-emptive provisioning strategy adopted in the quarter. We expect some normalization in provisions in the ensuing quarter as asset quality remains relatively intact for now.

Focusing on profitability rather than beating  industry  loans growth. Despite registering a below-industry loans growth of 3% q-o-q and 18%y-o-y (industry: 5% q-o-q and 21% y-o-y), improved yield management as well as focus on higher margin micro financing and credit cards helped boost Niaga’s net interest margins (NIM) by 4bps q-oq vs the industry’s 51bps q-o-q contraction. This resulted in a commendable 1% q-o-q increase in net interest income vs a contraction that is plaguing some of its larger peers.

Deposit growth continues to lag. The key negative take away from CIMB Niaga’s 1Q12 results was the fact that its deposit growth of 11% y-o-y continued to lag overall industry’s  y-o-y  growth  of 18%. We believe that this could be due to management’s strategy of not competing  aggressively on growing time deposits but to focus on cheaper  current account savings account (CASA) growth which will take time to execute. With LDR at 96.5%  (91.6% if we  include potential liquidity from liquid government bonds), a persistent lag in deposit growth could result in Niaga’s full-year loans growth coming in below the targeted 18% growth. This will result in CIMB group’s loans growth potentially falling short of management’s target of 16%. Anyhow, we have already conservatively built in a slower group loans growth assumption of 12%.

Source: OSK188