KUALA LUMPUR: PublicInvest Research is retaining its Trading Buy call on CIMB Group with the target price unchanged at RM5.18, which is  at parity to the FY16 book value.

It said on Monday that the banking group's Indonesian operations, CIMB Niaga's 1H2016 saw some relief to its performance, with income-related improvements and also on the asset quality front.

CIMB Niaga's gross non-performing loans (NPLs) seem to have stabilised thus improving its impairment ratio although very marginally. 

Gross loans were lower on-year as the CIMB Niaga continues to maintain a conservative growth strategy with the implementation of cost management initiatives thus seeing shrinking operating expenses. 

“Some turnaround signs seem to be showing, however we maintain that recovery will be slow amid the weak economic environment. The Indonesian government’s lower benchmark interest rate 6.75%, along with its planned stimulus measures for the year has encouraged more stability which we believe would bode well for the longer term,” it said. 

PublicInvest Research said CIMB Niaga's 1HFY16 operating income grew 8.2% on-year from improvements in its foreign exchange and capital markets business, while decreasing operating expenses (-1.2% on-year) saw pre-provision operating profits grow strongly at 19.7% on-year. 

Loans outstanding contracted 3.0% on-year but grew 2.5% on-quarter with the group continuing its cautious approach amid the weak economic environment. 

The commercial segment continued to record slippages all round, (Micro and SME: -6.7% on-year, Commercial: -3.8%, Corporate: -4.1%), but net interest income grew 4.8% on-year driven by higher consumer loans +1.3% on-year. 

The group’s progress is also persisted in its funding profile, with current account and savings account (CASA) growth of 5.7% on-year buoyed by the increase in savings, translating to a CASA ratio of 52.0% (1QFY16: 52.1%). A noticeable shift toward the retail space is expected, but will come at the expense of yields for the medium term. 

CIMB Niaga's net interest margins (NIMs) rose steadily to 5.47% in 2QFY16 from 5.35% in 1QFY16, owing to the improved CASA ratio, though is expected to remain under pressure owing to the competitive environment (particularly in the retail space) and its focus on better quality credits. Management has guided a NIMs target of around 5% for 2016. 

“We are encouraged by the non-deterioration of asset quality this quarter, following three years of weakness signaling a turnaround could be in sight. 

"Gross impairment ratio was at 4.94% (1QFY16: 4.97%), special mention loans fell to 8.38% (1QFY16: 10.37%) while gross non-performing loans (NPL) maintained at 3.90%, (1QFY16: 3.90%). Loan loss coverage is 120.9% (1QFY16: 116.1%),” said PublicInvest Research.