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Finance

CIMB Group earnings likely to recover post 3Q profit dip

Analysts expect hefty savings from cost cuts likely to boost profit next year

KUALA LUMPUR (Nikkei Markets) -- Earnings of CIMB Group Holdings will likely recover in the months ahead following expected income growth and cost-cutting measures, analysts said after shares of the second-largest Malaysian bank by assets fell tracking a 14% decline in third quarter net profit.

CIMB Group booked 349 million ringgit ($83.62 million) in "transformational cost" during the quarter following reduction of nearly 2,200 staff at its Malaysian and Indonesia operations. The trimming of head count is expected to generate annual savings of up to 200 million ringgit that could be plowed back into business.

"Part of these savings will be reinvested for the Forward23 strategy," said AmInvestment Bank Analyst Kelvin Ong.

Savings from the so-called transformational program could help lift next year's earnings above expectations, said Maybank Investment Bank Analyst Desmond Ch'ng, who raised his rating to Buy with a target price of 5.80 ringgit per share, higher than the previous target of 5.50 ringgit a share. "Moreover, future dividend payout ratios could trend toward the higher end of the group's guidance of 40%-60%," he added.

While the headline results largely dovetailed with analyst expectations, shares of CIMB Group fell as much as 1.5% on Monday, dragging the country's benchmark index lower on a day when regional markets were posting strong gains.

On Friday post-market hours, CIMB Group reported a net profit of 1.01 billion ringgit for the third quarter compared with 1.18 billion ringgit over the same period last year as personnel costs surged over 40%. Net interest income rose 6.4% year-on-year to 2.57 billion ringgit, while net noninterest income gained 18% to 1.25 billion ringgit.

Nine-month net profit fell 17% year-on-year to 3.71 billion ringgit. Net interest margin, a measure of profitability from the difference between the interest paid and received, contracted five basis points to 2.47% at the end of September due to policy rate cuts in Malaysia and Indonesia.

In May, Bank Negara Malaysia lowered its overnight policy rate by 25 basis points, or 0.25 percentage-point, while Bank Indonesia has cut the seven-day reverse repurchase rate four times this year to 5.00%.

A decline in policy rate can hurt banks' profits as it squeezes interest rates banks can charge on loans. Further, floating-rate loans will be re-priced following policy rate changes, while deposits are typically offered with fixed-rate interests that can't be immediately adjusted.

Apart from cost-cutting measures, "we believe the underlying factors such as income and credit cost will continue to improve," said MIDF Amanah Investment Bank Analyst Imran Yassin Yusof. "Overall, we continue to be cautiously optimistic on the group's prospects."

On its part, CIMB Group remains on track to meet key targets, said Chief Executive Zafrul Aziz. "Going into 2020, we will continue to make necessary investments, particularly in our people and technology, to ensure resilience in anticipation of banking industry challenges," he added.

For this year, CIMB Group is targeting return-on-equity of 9%-9.5% and loan growth of 6%. The lender also expects to keep Common Equity Tier 1 ratio above 12% and cost-to-income ratio flat from about 53% in 2018.

Shares of CIMB Group ended Monday 0.6% lower at 5.34 ringgit apiece, while the benchmark FTSE Bursa Malaysia KLCI closed 0.3% down.

--Jason Ng

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