31 October 2016 CIMB Niaga 3QFY16 Results Review CIMB Group Holdings Bhd Prospect brightening up in Indonesia Maintain BUY Unchanged Target Price (TP): RM5.50 INVESTMENT HIGHLIGHTS Strong quarter for CIMB Niaga resulting in 9MFY16 net profit growth of +110.2%yoy RETURN STATS Price (28 Oct. 2016) RM5.03 Robust growth underpinned by higher operating income, lower OPEX and drop in provisions Operating income was boosted by NOII, while NII was supported by better NIM underpinned by growth in CASA franchise CI ratio improvement on right track, came in below 50% level Provisions elevated but improving Loans declined due to weakened conditions and rebalancing of portfolio Management cautiously optimistic on Indonesian economic prospects No change to our forecasts Despite the recent price run-up we maintain BUY with unchanged TP of RM5.50, pegging the stock to 1.0X Price-to-Book multiple, pending CIMB Group results Another strong quarter. Core net profit for Niaga in 3QFY16 rose by +27.4%yoy to IDR563b. As a result, 9MFY16 net profit grew +110.2%yoy to IDR1.3t. The strong growth was underpinned by higher operating income, lower OPEX and drop in provisions. Target Price RM5.50 Expected Share Price Return +9.3% Expected Dividend Yield +4.2% Expected Total Return +13.5%* * We are making an exception pending the release of CIMB Group s 3QFY16 result. STOCK INFO KLCI 1,670.27 Bursa / Bloomberg Board / Sector Syariah Compliant 1023 / CIMB MK Main / Finance No Issued shares (mil) 8,728.9 Par Value (RM) 1.0 Market cap. (RM m) 43,906.4 Price over NA 0.9x 52-wk price Range RM3.89 RM5.10 Beta (against KLCI) 1.18 3-mth Avg Daily Vol 11.35m Operating income boosted by higher NOII. The 9MFY16 operating income grew +8.4%yoy to IDR11.13t. The bulk of the growth came from higher NOII on the back of improved capital markets. NOII grew +29.0%yoy to IDR2.24t, with forex & fixed income derivatives and fees & commissions higher by +225.3%yoy to IDR618b and +5.0%yoy to IDR1.32t respectively. Steady NII from improved NIM. Meanwhile, NII grew at steady +4.3%yoy to IDR8.89t. This was due to improvement in NIM coming from higher CASA ratio, as evident by the lower interest expense (- 13.2%yoy). NIM improved +35bps-yoy to 5.54%, with CASA ratio increasing by 4.92ppt to 52.6%. Management indicated that it expects NIM to gravitate towards 5.0% level. However, we believe that the NIM pressure will be moderated by the growth in its CASA franchise. Current account and savings account deposits grew by +1.4yoy and +11.1%yoy respectively. 3-mth Avg Daily Value Major Shareholders MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures RM55.87m Khazanah 29.26% EPF 15.35% Some banking abbreviations used in this report: CA = Collective Impairment Allowance CI = Cost to Income CET1 = Common Equity Tier 1 GIL = Gross Impaired Loan LD = Loan-Deposit NII = Net Interest Income NOII = Non-interest income NIM = Net Interest margin CASA = Current and Savings Accounts COF = Cost of Funds IB = Investment Banking LLC = Loan Loss Coverage PPOP = Pre-Provisioning Operating Profit
CI ratio improvement on the right track. OPEX for 9MFY16 grew modestly at only +1.9%yoy to IDR5.54t. This is excluding the MSS cost of IDR471b in 9MFY15. Breaking it down further, personnel cost went down -0.6%yoy to IDR2.61t, moderating general & admin cost increase of +4.8%yoy to IDR2.73t. This had resulted in CI ratio improving by -3.2ppt-yoy, to 49.8% from 53.0% in 9MFY15. Provision expenses remain elevated but continue to improve. CIMB Niaga reported lower provisions of - 4.9%yoy to IDR3.78t. For 3QFY16, provisions fell -0.4%qoq to IDR1.22t. Credit cost improved -21bps-yoy to 2.77%. CIMB Niaga continues to focus on managing its asset quality even as Gross NPL and Net NPL ratio came in at 4.21% and 2.39% in 9MFY16 respectively, from 3.17% and 1.47% in 9MFY15. The drop in Gross and Net NPL ratio was due to weakened economic conditions. Nevertheless, GIL ratio was stable at 5.2% for 9MFY16 from 5.18% over same period last year. We believe that the GIL ratio is a more forward looking indicator of asset quality as its covers impaired loans potentially turning NPL. Hence, we believe that asset quality is stabilizing. In addition, management is cautiously optimistic on the macroeconomic conditions given recent signs of improvement. We understand that the positivity in the macroeconomic conditions have yet to trickle down to the microeconomic levels. Loans declined due to the economic slowdown and its strategy to be prudent on asset growth. Gross loans for CIMB Niaga as at end September 2016 declined -2.7%yoy and -0.7%qoq to IDR174.1t. While the economic slowdown contributed to the decline, it was also due to refocusing of its loans portfolio. Dissecting the loans profile, the largest decline came from Micro & SME banking which declined -6.3%yoy to IDR33.0t due to conscious effort to limit the growth of this section. Consumer banking declined only by -0.8%yoy to IDR51.0t, where the only decline coming from auto loans section (-17.4%yoy to IDR15.5t) which again was deliberate. Comparatively, corporate banking grew +2.2%yoy to IDR57.4t. Slowdown in asset growth led to improved liquidity compared to preceding quarter. CIMB Niaga reported a slightly lower LD ratio of 96.07% in 3QFY16, largely due to negative loan growth. This was an improvement of 47bps from 2QFY16. The percentage of CIMB Niaga loans classified under Special Mention was 7.48% in 3QFY16 vs. 8.26% in 3QFY15. FORECAST No change to our forecasts for now. VALUATION AND RECOMMENDATION Cost initiatives clearly bear fruit with more efforts to lower OPEX in the near future. This had contributed to the strong growth in earnings thus far this year. Possible positive impact to earnings may also emanate from recoveries in the coal and coal-related loans. In addition, we are positive on CIMB Niaga's strategy to continue to optimize CASA and adopt cautious approach on growth with asset quality selection made a priority. This will ensure a stronger foundation for CIMB Niaga to grow on during an eventual upturn. The macroeconomic condition in Indonesia is improving, while it has yet to manifest at the microeconomic level. The successful government tax amnesty program and BI easing monetary policy stance also underline positive medium term outlook for CIMB Niaga. We believe the optimistic outlook for CIMB Niaga will contribute positively to CIMB Group. Therefore, we maintain our BUY recommendation (despite the expected total return is now below the +15% threshold pursuant to recent run-up in its share price) pending the release of CIMB Group's 3QFY16 result. Our unchanged TP of RM5.50 is pegged to an undemanding 1.0x PB multiple on FY17 BVPS. 2
INVESTMENT STATISTICS OF CIMB GROUP FYE Dec FY14 FY15 FY16F FY17F Net interest income (RM m) 8,656 9,337 9,988 10,844 Islamic banking income (RM m) 1,461 1,569 1,679 1,601 Non-interest income (RM m) 4,029 4,490 4,352 4,464 Total income (RM m) 14,146 15,396 16,020 16,910 Pretax profit (RM m) 4,276 3,914 5,150 6,062 Net profit 3,107 2,850 3,955 4,536 Core Net profit (RM m) 3,159 3,411 3,955 4,536 Core EPS (sen) 38.1 40.2 46.0 53.0 PER (x) 13.2 12.5 10.9 9.5 Net Dividend (sen) 21 14 19 21 Net Dividend Yield (%) 4.2 2.8 3.8 4.2 Book value per share (RM) 4.44 4.81 5.15 5.50 PBV (x) 1.1 1.0 1.0 0.9 ROE (%) 9.3 8.6 9.3 10.0 DAILY PRICE CHART Syed Muhammed Kifni Imran Yassin Yusof imran.yassin@midf.com.my 03-2173 8395 3
Table 1: Comparison of quarterly results FYE Dec (IDR b) Quarterly results (normalised) Yoy 3QFY16 2QFY16 3QFY15* (+/- %) Qoq (+/- %) NII 3,074 2,976 2,978 3.2% 3.3% Comments Due to decline in interest expense (-15.2%yoy) as CASA grew +6.1%yoy. NOII 775 748 556 39.4% 3.6% Contributed by improved capital markets. Net income 3,849 3,724 3,534 8.9% 3.4% Contributed by strong NOII growth. OPEX (1,874) (1,847) (1,728) 8.4% 1.5% PPOP 1,975 1,877 1,806 9.4% 5.2% Personnel cost marginally increased by +3.7%yoy to IDR860b. Write back/(pro vision) for loan losses Pre-tax profit (1,216) (1,221) (1,191) 2.1% -0.4% 760 655 615 23.6% 16.0% Net Profit 563 467 442 27.4% 20.6% Due to contained OPEX and strong NOII growth. EPS (IDR) 22.39 18.60 17.59 27.3% 20.4% *Core earnings after excluding Indonesia s MSS cost (IDR471b) Table 2: Comparison of financial ratios by quarters based on normalised financials Yoy Qoq 3QFY16 2QFY16 3QFY15 (+/- (+/- Financial Ratios (%) ppts) ppts) CET-1 16.56 15.96 13.90 2.66 0.60 Comments Total CAR 18.14 17.62 16.01 2.13 0.52 Gross NPL 4.21 3.90 3.17 1.04 0.31 Due to current weak conditions. Net NPL 2.39 1.93 1.47 0.92 0.46 GIL ratio 5.20 4.94 5.18 0.02 0.26 Loan Loss Coverage 107.00 120.90 120.96-13.96-13.90 Credit charge-off 2.62 2.82 2.67-0.05-0.20 Cost to income (CI) 48.69 49.61 48.88-0.19-0.92 CASA ratio 52.58 51.99 47.66 4.92 0.59 Continue to be maintained below 50% level. Improved on CASA growth (+6.1%yoy). LD ratio 96.07 96.54 92.04 4.03-0.47 NIM 5.67 5.62 5.40 0.27 0.05 ROE 6.77 5.72 6.19 0.58 1.05 4
Table 3: Comparison of cumulative results and ratios Quarterly results (normalised) FYE Dec (IDR b) 1HFY16 1HFY15* Yoy (+/- %) NII 8,887 8,524 4.3% Comments Due to better NIM as interest expense fell - 13.2%yoy. Moderated drop in interest income (- 4.3%yoy) from weak loans growth. Loans growth decline was partly deliberate. NOII 2,239 1,736 29.0% Contributed by improved capital markets. Net income 11,126 10,260 8.4% OPEX (5,543) (5,440) 1.9% Cost management initiatives bearing fruit. PPOP 5,583 4,820 15.8% Write back/(provision) for loan losses (3,778) (3,972) -4.9% Pre-tax profit 1,805 848 112.9% Net Profit 1,299 618 110.2% EPS (IDR) 51.68 24.60 110.1% + / - ppts ROE 5.45 2.88 2.57 NIM 5.54 5.19 0.35 CI 49.82 53.02-3.2 LD 96.07 94.93 1.14 Due to robust total income, OPEX management and lower provisions. CASA ratio 52.58 47.66 4.92 Continue to build on CASA franchise. *Core earnings after excluding MSS cost (IDR471b) 5
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Negative total return is expected, by -15% or more, over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6