AmInvestment maintains Hold on CIMB, provisions dampen CIMB Thai earnings
KUALA LUMPUR: AmInvestment Research has maintained its Hold recommendation on CIMB Group
with an unchanged fair value of RM6.70 a share.
This is based on FY18/price-to-book value of 1.2x on the back of a return on equity of 10.4%.
CIMB Group Holdings Bhd's subsidiary CIMB Thai posted a 78.5% lower on-quarter net profit of THB77mil (RM9.7mil) in Q3 2017 on higher provisions and operating expenses (opex).
Provisions will continue to dampen CIMB Thai's earnings leading to a weak Q4, says AmInvestment Research. However, the research firm expects CIMB Thai to record improved earnings in FY17 compared to FY16, which was impacted by high provisions.
It noted that CIMB Thai's earnings to group profits for FY17 will remain insignificant at under 5%.
In some of its financial highlights, CIMB Thai registered a cumulative net profit of THB55mil, 30.5% lower on-year for 9MFY17. Total income grew 1.5% on-year, which was offset by higher provisions due to an increase in non-performing loans (NPL) and rise in opex.
Opex grew 2.3% on-year owing to one-off business rationalisation expenses in closing down its braches and credit card businesses in Thailand.
Provisions increase 16.5% on-quarter to THB2bil in Q3FY17 resulting in a higher credit cost of 2.5% from the previous quarter.
"We expect provisions to remain elevated in the near term. This is due to the weakness in the asset quality of CIMB Thai's SME loans," said AmInvestment Research.
CIMB Thai's NPL ratio rose to 5.7% with loan loss cover at 85.1% as at the end of 9MFY17. Its loan-to-deposit ratio (LD) was 123% as at end 9MFY17 while its modified LD ratio was 99.4%.
9MFY17 net interest margin improved to 3.88% from 3.76% in the previous year due to a more efficient management of funding cost.
Non-interest income (NOII) slipped 5.2% on-year due to lower gains on trading, FX transactions and investments.
9MFY17 net service fee and income grew 21.0% on-year, underpinned by higher advisory, mutual funds and hire purchase fees.
"CIMB Group is on track to meet all of its FY17 key performance index targets with the exception of loan growth.We understand that Malaysia's loan growth has been tracking close to the group's targets while that of the overseas operations (Indonesia, Thailand and Singapore)
has been slow and behind targets.
"Hence, the group's loan growth target of 7.0% y-o-y for FY17 is likely to be challenging," said AmInvestment Research.
It added that CIMB management guided for an early assessment impact of a 50bps drop on its CET1 ratio with its regulatory reserves being allowed to offset against the higher provisions under MFRS 9.
CIMB also guided for its NIM in FY17 to be flat as compared to a contraction of five to 10bps in FY17 earlier. NIM in Thailand and Malaysia has been stable, while in Indonesia it has slipped due to lower asset yield, and it has improved in Singapore.
The group's disposal of its 18.21% stake in Bank of Yingkou is expected to be
completed by 4QFY17, said AmInvestment Research.
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