AmWatch - CIMB Group : Better sequential earnings for CIMB Thai in 1QFY15, 22 Apr 2015

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CIMB Group :  Better sequential earnings for CIMB Thai in 1QFY15          Hold

We downgrade CIMB Group Holdings (CIMB) to HOLD from BUY, with an unchanged fair value of RM6.30/share. This is based on an unchanged FY15F ROE of 11.2% and an unchanged fair P/BV of 1.3x.

CIMB Group Holdings Bhd’s (CIMB) 93.7%-owned subsidiary CIMB Thai Bank plc (CIMB Thai) recorded a relatively healthy recovery in net earnings on a QoQ basis in 1QFY15, to THB130.6mil (or RM14.9mil based on our estimate), from the previous quarter’s low of THB89mil, which was affected by a large increase in loan loss provision then.

The recovery in 1QFY15 came mainly from better-than-expected non-interest income, whereas loan loss provisioning remained elevated. Gross non-performing loans (NPL) continued to rise to THB7bil or 10.9% QoQ, from THB6.4bil in 4QFY14. This led to an uptick in gross NPL ratio to 3.7% in 1QFY15, from 3.3% in 4QFY14. The company said the increase during the quarter was due to slower repayments from several corporate accounts.

Loan loss provision came in much higher during the quarter (1QFY15: THB1,021.8mil vs. 4QFY14’s THB719.9mil), leading to larger credit costs of 215bps from 150bps in 4QFY14.  Despite that, we are positive that most of these new NPLs are largely provided for, as loan loss cover is maintained at 94.1% in 1QFY15, vs. 95.2% in 4QFY14.

On balance, CIMB Thai reported an unexpectedly better revenue income from the non-interest segment in 1QFY15, which is positive. However, NPL trend in CIMB Thai has yet to stabilise, but we are comforted by the loan loss provisioning stance taken. All in, we think that CIMB’s share price should be sustained by the latest CIMB Thai results.

Our earlier BUY rating on CIMB was mainly for earnings rebound given that the 4QFY14 is likely to be the worst quarter. The share price has moved closer to our fair value, which we believe, reflects our anticipated rebound in earnings for the group. Hence, we downgrade our rating to HOLD.           

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