By A. Stephanie
Research house Maybank KimEng (KE) today downgraded CIMB Group to “sell” following yesterday’s announcement of the group Indonesian arm, CIMB Niaga’s weak 1Q15 results.
Net profit for the quarter ended March 31, 2015 (1Q15) was just Rp83 billion (RM23.53 million), down a massive 92% year-on-year (y-o-y) from 1Q14. This is way off Maybank KE’s original full-year forecast of Rp3.6 trillion.
The research house said Niaga management expects the country’s weak operating environment to persist into 2Q15 and guides for ongoing net interest margin (NIM) compression.
Maybank KE said, “Provisioning levels are expected to remain elevated in 2Q15, but management does not expect the gross non-performing loan (NPL) ratio to breach 5%. While we think that our provisioning assumptions are sufficiently conservative, the operating environment has been weaker than expected.
“Cutting our NIM and non-interest income (NOII) assumptions, we downgrade CIMB Niaga’s 2015 and 2016 net profit forecasts by 23% and 11% respectively. This leads to an estimated 6% impact to CIMB Group’s 2015 earnings and 3% to the group’s 2016 earnings.
“Our earnings forecasts and target price of RM5.70 for CIMB Group are maintained pending the release of group results, but with restructuring costs filtering through as well, we see little reason to hold on to the stock for now, thus the downgrade to ‘sell’ from ‘hold’,” the research house said.
CIMB Niaga’s 1Q15 net profit rose 79% quarter-on-quarter (q-o-q) from a low base of Rp46 billion to Rp83 billion. The research house noted that Niaga’s 4Q14 results would have been in the red to the tune of Rp192 billion if not for an exceptional gain from the sale of a building that quarter.
Operating profit of Rp1.55 trillion in 1Q15 was also weaker than expected at just 20% of Maybank KE’s full-year forecast, attributed mainly to the weak economic environment. However, Niaga’s management has maintained its stance that the Indonesian economy will pick up pace in the second half of 2015.
Amid a weak economic environment, Niaga’s loan growth was just 9.6% y-o-y and NOII declined 29% YoY. Meanwhile, overheads expanded 9% y-o-y versus operating income growth of 1% y-o-y.
CIMB Niaga’s loan growth end-Mar 2015 was a slower 9.6% versus 12% the previous corresponding period, also slower than management’s target of low teens growth for the year.
However, Maybank KE noted that Niaga’s corporate loans growth remained robust at 16% growth while SME loans rose 11% for the same period. Consumer and commercial loans growth meanwhile slowed at 7% y-o-y and 3% y-o-y respectively.
“This growth profile essentially reflects management’s strategy of focusing its efforts on higher quality corporate names as well as the provision of short-term working capital lines to businesses,” the analyst commented.
Maybank KE said asset quality continued to deteriorate, with a higher special mention loans of 5.9% as at end-Mar 2015 compared to 4.3% at at end-2014, and gross NPL ratio of 4.1% versus 3.9% at end-2014.
“A consolation is that Niaga’s overall loan loss coverage was a higher 102% vs 89% end-2014. Coal and coal related NPLs accounted for 40% of total NPLs with a loan loss coverage of 60%, versus 54% end-2014. The coal sector aside, management is also wary of asset quality in the manufacturing sector,” the analyst noted.
In absolute terms, gross NPLs rose about Rp300 billion q-o-q to Rp7.18 trillion end-Mar 2015, and have doubled from Rp3.5 trillion as at end-2013.
As at noon today, CIMB Group’s share price on Bursa Malaysia was RM6.21, down three sen or 0.48% from its previous closing price of RM6.24.
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