Bank CIMB Niaga: Negatives Priced In

Summary

• Bank CIMB Niaga's loans growth is expected to be flattish this year, compared with earlier expectations of a +6%-8% increase as the bank places a stronger emphasis on asset quality.
• Bank CIMB Niaga's net interest margin declined by -26 basis points YoY to 5.02% in 1Q2020, but it still expects net interest margin to stay above 5% for FY2020.
• There was a sharp increase in special mention loans in 1Q2020, and Bank CIMB Niaga has revised guidance for credit costs upwards from 1.5%-1.8% to 1.8%-2.3%.
• Bank CIMB Niaga trades at 0.39 times P/B and 4.1 times consensus forward next twelve months P/E, and it offers a consensus forward FY2020 dividend yield of 6.5%.

Elevator Pitch

I maintain my "Bullish" rating on Indonesia-listed mid-sized bank Bank CIMB Niaga (OTC:PTNAF) [BNGA:IJ].

This is an update of my prior article on Bank CIMB Niaga published on March 2, 2020. Bank CIMB Niaga's share price has decreased by -20% from IDR785 as of February 27, 2020 to IDR625 as of May 27, 2020 since my last update.

Bank CIMB Niaga's loans growth is expected to be flattish this year, compared with earlier expectations of a +6%-8% increase as the bank places a stronger emphasis on asset quality. There was a sharp increase in special mention loans in 1Q2020, and Bank CIMB Niaga has revised guidance for credit costs upwards from 1.5%-1.8% to 1.8%-2.3%. Bank CIMB Niaga's net interest margin also declined by -26 basis points YoY to 5.02% in 1Q2020, but it still expects net interest margin to stay above 5% for FY2020 backed by an improving CASA ratio.

Nevertheless, the negatives have been largely priced in, with Bank CIMB Niaga trading at 0.39 times P/B, which represents a significant discount to its historical five-year and 10-year mean P/B multiples of 0.65 times and 1.13 times respectively. The stock is valued by the market at 4.1 times consensus forward next twelve months P/E, and offers a consensus forward FY2020 dividend yield of 6.5%.

Readers have the option of trading in Bank CIMB Niaga shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker PTNAF, or on the Indonesia Stock Exchange with the ticker BNGA:IJ. For Bank CIMB Niaga shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

For Bank CIMB Niaga shares listed in Indonesia, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Indonesia Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $170,000, and market capitalization is above $1.0 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Bank CIMB Niaga shares listed in Indonesia include Norges Bank Investment Management, Allianz Global Investors Asia Pacific Limited and State Street Global Advisors, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

Lower Loans Growth Expectations For FY2020

Bank CIMB Niaga grew its loans by a respectable +3.3% YoY from IDR187.99 trillion in 1Q2019 to IDR194.28 trillion in 1Q2020. Loans for the consumer banking segment and corporate banking segment increased by +9.8% YoY and +7.0% YoY respectively in 1Q2020, which was partially offset by YoY declines of -9.8% and -4.1% for the SME banking and commercial banking segments respectively over the same period.

The near-term outlook for Bank CIMB Niaga's loans growth is bleak, as the coronavirus pandemic takes its toll on the Indonesia economy. As at the time of writing, there are 23,851 confirmed cases of coronavirus infections (of which 6,057 of them have recovered) and 1,473 deaths on a cumulative basis in Indonesia. In the first quarter of 2020, Indonesia's GDP grew by +2.97%, which was significantly lower than consensus estimates in the 4% range. Looking ahead, Fitch Solutions expects Indonesia to deliver a GDP contraction of -1.3% for full-year 2020, compared with its earlier forecast of a growth of +2.8%.

In view of weak economic conditions in Indonesia, Bank CIMB Niaga is expected to prioritize asset quality over loans growth. At the company's 1Q2020 earnings call on May 8, 2020, Bank CIMB Niaga guided for loans growth "to be flattish from here on out", as compared to earlier guidance of FY2020 loans growth in the +6%-8% range. The company also stressed at the recent earnings call that "we don't really aggressively go after new loans" and "I don't really foresee massive expansions in our portfolio."

Net Interest Margin Pressure To Be Mitigated By Increase In CASA Ratio

Bank Indonesia, Indonesia's central bank, has already cut its benchmark interest rate twice this year. Indonesia's benchmark interest rate was reduced by -25 basis points to 4.75% in February, prior to being cut by an additional -25 basis points to 4.50% in March. Further interest rate cuts in the year are not to be ruled out. For example, ING noted in an article published on May 19, 2020 that it anticipates "more rate cuts in the coming months given expectations for a contraction in GDP as early as the 2Q."

Apart from the benchmark interest rate cuts, the restructuring of Bank CIMB Niaga's loan book due to debtor woes is another key downside risk for its net interest margin. Bank CIMB Niaga currently has approximately 6%-9% of its loan book restructured, and it expects this ratio to increase to 15%-25% by end-FY2020.

Bank CIMB Niaga's net interest margin declined by -26 basis points YoY and -12 basis points QoQ to 5.02% in 1Q2020. Nevertheless, Bank CIMB Niaga is still maintaining its earlier guidance of a net interest margin in excess of 5% for FY2020, as the company noted at its 1Q2020 earnings call on May 8, 2020 that while "the loans' repricing is fully reflected (the impact of the benchmark interest rate cut), but the deposit repricing has not." Market consensus expects Bank CIMB Niaga to achieve a net interest margin of 5.17% for full-year FY2020.

A key factor in Bank CIMB Niaga's ability to maintain its net interest margin above 5% is the company's improving CASA (Current Account Savings Account) ratio. Bank CIMB Niaga's CASA increased by +12.4% QoQ and +18.8% YoY to IDR121.65 trillion in 1Q2020, while its CASA ratio improved from 53.74% in 1Q2019 and 55.35% in 4Q2019 to 60.06% in 1Q2020.

Bank CIMB Niaga emphasized at its 1Q2020 earnings call on May 8, 2020 that "we are now at 60-some percent (for CASA ratio), but we have higher ambitions" and "we invested a lot in growing our CASA franchise."

Asset Quality In The Spotlight

Bank CIMB Niaga's asset quality is in the spotlight, as its special mention loans grew from 4.40% of total loans as of end-March 2019 to 8.10% of total loans as of end-March 2020. The sharp increase in special mention loans is partly attributable to a rise in the value of certain USD-denominated special mention loans in tandem with a strengthening of the USD versus the IDR, and also partly due to a certain proportion of loans which have yet to be restructured (and subsequently moved out of the special mention loans category).

Going forward, Bank CIMB Niaga expects its cost of credit to be in the 1.8%-2.3% range for full-year FY2020, which represents a significant increase from earlier guidance for credit costs in the 1.5%-1.8% range.

Valuation And ROE

Bank CIMB Niaga trades at 0.39 times P/B based on its share price of IDR625 as of May 27, 2020. In comparison, the stock's historical five-year and 10-year mean P/B multiples were 0.65 times and 1.13 times respectively.

Among the 10 largest Indonesia-listed banks (in terms of total assets), Bank CIMB Niaga is the cheapest with respect to its P/B valuation. CIMB Niaga has the lowest P/B multiple in the peer group, despite the fact that the company's FY2020 ROE is higher than that for four of its peers as per the peer comparison table below.

P/B Multiples And ROEs For Indonesia's Top 10 Listed Banks With Respect To Asset Size

Source: Author

Bank CIMB Niaga is also valued by the market 4.2 times trailing twelve months P/E and 4.1 times consensus forward next twelve months P/E. In contrast, the stock's historical five-year and 10-year average consensus forward next twelve months P/E multiples were 10.5 times and 10.7 times respectively.

Bank CIMB Niaga offers consensus forward FY2020 and FY2021 dividend yields of 6.5% and 6.4% respectively.

Earlier, Bank CIMB Niaga had guided at the company's FY2019 earnings call on February 19, 2020 that it expects FY2020 ROE to be in the 11%-12% range. Considering the negative impact of the coronavirus pandemic on the Indonesian economy, expectations for Bank CIMB Niaga's future ROE have been lowered.

At the company's 1Q2020 earnings call on May 8, 2020, Bank CIMB Niaga acknowledged that "there's very little visibility in terms of what's going on in the next coming quarters" and highlighted that it expects FY2020 ROE to "be in the single digit." Market consensus currently expects Bank CIMB Niaga to achieve ROEs of 6.9% and 8.7% for FY2020 and FY2021 respectively.

Risk Factors

The key risk factors for Bank CIMB Niaga are a deterioration in asset quality if the coronavirus pandemic takes a longer than expected time to be contained, lower-than-expected net interest margin on further benchmark interest rate cuts, and a cut in dividends going forward.

Note that readers who choose to trade in Bank CIMB Niaga shares listed as ADRs on the OTCBB (rather than shares listed in Indonesia) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.