‘Indonesia ops could drag down banking groups earnings’

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KUCHING: The disappointing financial results for the nine months of 2014 (9M14) posted by the Indonesian operations of the country’s two largest banking groups could weight down their third quarter 2014 (3Q14) financial performance due this month.

PT Bank CIMB Niaga Tbk (CIMB Niaga), the Indonesian operation of CIMB Group Holdings Bhd (CIMB Group) reported a 29 per cent year-on year (y-o-y) decline in its net profit for 9M14 to 2.3 trillion rupiah on October 29.

Meanwhile, PT Bank Internasional Indonesia Tbk (BII), whereby Malayan Banking Bhd (Maybank) has 97 per cent stake in, posted a 68 per cent y-o-y drop for its 9M14 earnings to 355 billion rupiah.

These lacklustre results could impact the upcoming 3Q14 earnings for CIMB Group and Maybank to be announced in November, analysts said.

In the meantime, analysts forewarned that there could be more downside risks to the banking groups 4Q14 earnings.

The research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital Research) in a report said CIMB Niaga’s 3Q14 results continue to disappoint due to a spike in provisions, with more downside risks expected in 4Q14.

Affin Hwang Capital Research analyst Tan Ei Leen said, “We continue to see downside risk to CIMB Group’s earnings as headwinds from Indonesia remain persistent coming from amongst others, rising non-performing loans (NPLs), weakening loan growth and net interest margin (NIM) and contraction in non-interest income.

“All in, we do not see much reason to turn overly optimistic on CIMB Group despite the proposed merger with RHB Capital (Bhd) and Malaysia Building Society Bhd (MBSB) owing to the risk of high merger cost, challenges in value creation, asset quality issues as well as integration risks with regards to the proposed merger and acquisition exercise with RHB Capital and MBSB,” Tan said.

Thus, Affin Hwang Capital Research cut its earnings estimate for CIMB Group for financial year 2014 (FY14) to FY16 by 4.9 per cent, 7.1 per cent and 8.7 per cent respectively due to the potential of additional provisions of five basis points (bps) at the group level and lower loan growth assumptions of seven to 7.5 per cent which is lower than the previous projection of 10 per cent.

Specifically, the research firm noted the dimming Indonesian coal sector arising from sharp fall in market prices for coal could have an impact on the NPL of CIMB Niaga through its exposure on its loan portfolio.

Affin Hwang Capital Research observed CIMB Niaga has impaired the entire coal or coal-related portfolio resulted in 9M14 credit cost rose to an annualised 125 bps.

Going forward, the research firm expects the banking group’s provisions continue to rise as its loan loss cover (LLC) which currently stood at 82.9 per cent will jump to 100 per cent in 4Q14.

Additionally, it foresees CIMB Niaga’s NIM will remain under pressure to grow despite reported marginal improvement to 5.32 per cent in 3Q14 from 5.26 per cent in 2Q14.

Furthermore, it noted CIMB Niaga’s loan growth for 9M14 remained decent at 7.3 per cent y-o-y spurred by corporate and small medium micro enterprise (SMME) segments.

For Maybank’s BII, the research firm of TA Securities Holdings Bhd (TA Research) in a report said the banking group’s asset quality deteriorates in a number of its past global banking borrowers.

TA Research opined that the current tough operating environment in Indonesia has been one of the reasons for the increase in the bank’s provisions.

The research firm observed BII’s overall gross NPL ratio for 9M14 stood at 2.55 per cent compared with 1.74 per cent in the corresponding period last year.

TA Research added concerns over the sustainability of the top banking group’s earnings and achieving its return on equity remain a potential de-rating catalysts of the banking group’s valuation.

Apart from that, the research firm said the outlook for the financial market in Indonesia remains less than sanguine at present due to lack of volatility and businesses waiting for more concrete policies from the government to overcome some of the country’s macro issues.

Therefore, the research firm is neutral on the prospects of the banking sector and the forward earnings of the two banking groups in Malaysia.