CIMB Group Holdings Bhd
(Jan 23, RM4.88)
Maintain buy rating with an unchanged fair value of RM5.40: CIMB Group Holdings Bhd’s 93.7%-owned subsidiary, CIMB Thai reported a net loss of 1.42 billion baht (RM179.4 million) in the fourth quarter of financial year 2016 (4QFY16) (-431.2% quarter-on-quarter [q-o-q]), largely due to higher provision expense and operating expenses. This led to a cumulative net loss of 630 million baht for 12 months of FY16 (12MFY16), a decline of 159.8% year-on-year (y-o-y).

In Thailand, the pace of economic recovery was gradual. CIMB Thai’s stronger top-line growth of +5.7% y-o-y for 12MFY16 was offset by higher provisions from an increase in non-performing loans (NPLs) in the commodities-related industries (inclusive of the rice industry). 

Provisions grew by +243.5% q-o-q to 2.9 billion baht in 4QFY16. This resulted in a higher credit cost of 5.5% in 4QFY16, up from 1.6% in 3QFY16. The increase in provisions in 4QFY16 was not a surprise as we had highlighted this in our earlier update note. We believe the rise in provisions in 4QFY16 to be a clean-up exercise. CIMB Thai’s provisions have peaked in FY16 and are expected to improve in FY17, leading to a net profit. 

NPL ratio rose to 6.1% as at end-12MFY16 compared to 3.1% for 12MFY15 contributed by slower repayments from corporate and small and medium enterprise loans. This resulted in a lower loan loss cover of 77.3% for 12MFY16. The loan-to-deposit (LD) ratio stood at 115.4% as at end-12MFY16, while the modified LD ratio was 92.4%. Gross loans grew +3.9% y-o-y in FY16. CIMB Thai is targeting a loan growth of 5% to 10% in FY17. 

12MFY16 net interest margin saw an improvement to 3.77% (12MFY15: 3.27%). This was contributed by a more efficient management of funding cost. For 12MFY16, non-interest income slipped -18.5% y-o-y. This was due to lower gains on trading, foreign exchange transactions and investments, higher losses from financial liabilities and a drop in other operating income, which offset an increase in net fee and service income. 

CIMB Thai announced a rights issue to raise 5.5 billion baht via 5.5 billion new shares (par value: 0.5 baht a share) at the price of one baht a share. This was based on the ratio of two new shares for every nine existing CIMB Thai shares. The rights issue is not expected to cause a dilution in earnings contribution of CIMB Thai to CIMB Group. This is in view that its rights shares will be largely taken up by CIMB Group as a 93.7% shareholder of CIMB Thai. — AmInvestment Bank, Jan 23