CIMB Group Thai unit’s 1H net profit up 15%

by **Cals** Tue 22 Jul 2014, 01:25

CIMB Group Thai unit’s 1H net profit up 15%
Business & Markets 2014
Written by Affin Investment Bank Research
Monday, 21 July 2014 10:03

CIMB Group Holdings Bhd
(July 18, RM6.95)
Maintain reduce with target price of RM7.05: CIMB Thai Bank Pcl’s first half ended June 30 of financial year 2014 (1HFY14) net profit rose by 15% year-on-year (y-o-y) to 625 million baht (RM62 million). Based on our FY14 net profit forecast of RM4,434 million for the CIMB Group, its Thai unit’s annualised results work out to a contribution of 2.8% to CIMB’s earnings, which is slightly below our expectation of close to 3.4% of group’s earnings.

Nonetheless, the impact of the variation in net earnings of the Thai unit is not significant on CIMB’s FY14E earnings.

1HFY14 key operating income drivers were:- (i) 24.4% y-o-y expansion in net interest income, underpinned by early redemption of hybrid instruments, loan expansion (+4% from December 2013) and improving net interest margin from 3.22% for 1HFY13 to 3.35%; (ii) 12.8% y-o-y growth in net fee and services income; and (iii) robust 58.8% expansion in non-interest income. Despite a 18.7% y-o-y increase in operating expenses, the cost-to-income ratio trended lower from 71.7% in 1HFY13 to 67% 1HFY14.

Nonetheless, on a quarter-on-quarter (q-o-q) basis, net profit was down sharply by 58%, on the back of weaker non-fund based income (-53% q-o-q) and lower net fee and services income (-13.7% q-o-q) and the increase in operating cost (+5% q-o-q).

An increase in defaults of certain sizeable corporate accounts (which do not represent the overall trend) and retail defaults have resulted in an uptick in the gross non-performing loan ratio to 3.1% in June 2014 from 2.5% as at end-December 2013. Management is continuing to take prudent steps and has stepped up provisions to 5.6 billion baht, which is in excess of 2.6 billion baht.

On a positive note, the capital adequacy of CIMB Thai remains well above the regulatory requirements subsequent to the capital injection last year — Tier-1 capital stood at 10.4% while the group Bank for International Settlements ratio was at 13.4% as at the second quarter ended June 30 (2QFY14).

We maintain our “reduce” rating on CIMB with our target price unchanged at RM7.05, premised on FY15E return on equity of 12.3%, a cost of equity of 10% and growth rate of 5%, which translate into a price-to-book value multiple of 1.45 times. CIMB’s share price outlook in the near term will remain subdued owing to selling pressure arising from the group’s involvement in the proposed merger with RHB Capital Bhd as well as the creation of an Islamic banking franchise with Malaysia Building Society Bhd. We believe that once details of the proposal are finalised, and should merger synergies turn out to be well received by the market, CIMB’s share price may see a rerating. In our view, the merger proposal between CIMB and the other entities may require additional capital outlay in order to maintain sufficient capital adequacy ratios, in line with the transitional arrangements of Basel 3. At present, we believe the entities may be merged through a share swap.

In our view, the group’s FY14E outlook will remain mediocre as capital market deal executions have been sluggish and delayed. We are still cautious on its Indonesian banking operations (28% of profit before tax [PBT]) due to concerns of potentially rising defaults, but on the flip side, domestic operations will continue to sustain group earnings and remain as the key driver (62% of group PBT). — Affin Investment Bank, July 18

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This article first appeared in The Edge Financial Daily, on July 21, 2014.