CIMB's revamp begins to pay off

PETALING JAYA: CIMB Group Holdings Bhd may have turned the corner if some of its recent ratio indicators are anything to go by.

The country's second largest bank by asset size showed notable improvement in some of its key ratios such as cost to income, gross impaired loans and its common equity Tier 1 or CET1 ratio - where the latter is a sign of an increase in the bank's overall financial strength.

"The management has been working on improving the numbers for a long time. The benefits will continue to come through slowly this year.

"If one looks along the lines of operating numbers, the momentum is good," said a banker.

The major concern is still loan loss provisions especially for its Indonesian loans that could continue to be a drag on its future earnings amid an environment of uncertainty and challenges.

"Nevertheless the management has guided that provisions for this year will not be worse than last year," said the banker.

The group did say that while provisions would continue to be made particularly for Indonesia, these should be lower moving forward even as economic growth in Indonesia starts to stabilise after a harrowing year which saw it expand the slowest in six years.

For now, slower loans and deposit growth also remain concerns.

Banking analysts, at the moment, appear divided on the bank's performance.

While MIDF Research has tweaked its earnings forecast, revising its net profit target for financial year ending Dec 31, 2016 (FY16) higher by 5.7 per cent on more possible cost savings by CIMB, Kenanga Research has cut its FY16 estimated core profit slightly by 2 per cent, citing uncertainties and a challenging environment.

Kenanga warned of risks such as a steeper margin squeeze from tighter lending rules and stronger-than-expected competition as well as a higher-than-expected rise in credit charge as a result of a potential up-cycle in non-performing loans.

CIMB reported last week a net profit which saw a jump of 312 per cent for its fourth quarter ended Dec 31, 2015 compared to the same period a year earlier.

In terms of operating income, the group registered a 9.8 per cent year-on-year growth in FY15, while annualised return on equity stood at 8.6 per cent excluding restructuring costs.

The group also strengthened its CET1 ratio to 10.3 per cent while its gross impairment ratio was down marginally to 3 per cent from 3.1 per cent in 2014.

Cost to income ratio, which is a measure of how tight a ship the bank runs, was down by 350 basis points to 55.6 per cent for FY15.

Notably, although an improvement, this did not meet its earlier target of 55 per cent.

All things considered, Hong Leong Research has revised its FY16-FY17 net profit target for CIMB by up to 1.8 per cent.

A weaker-than-expected economic growth trend and volatile markets globally have been putting a dent on loan growth - a main source of income for banks - not only affecting CIMB but the entire regional banking sector as well.

In Indonesia, for instance, where CIMB once derived up to 30 per cent of its profits via unit PT Bank CIMB Niaga Tbk, banks have been facing pressure on their earnings due to their high exposure to the commodities sector which has seen tremendous price weakness in the past quarters.

In FY14, CIMB Niaga proved to be a huge dampener to the group's overall performance amid high non-performing loans and deteriorating asset quality.

Over the past one year, CIMB has focused on restructuring, reducing cost and realistically addressing the issue of deterioration of the asset quality of its Indonesian banking unit. And it appears, some of these efforts have paid off.

CIMB last traded at RM4.47(S$1.50), up 5.2 per cent.