1HFY25 Net Profit Driven by Lower Provisions

CIMB Niaga posted a 1.4% YoY increase in 1HFY25 net profit to IDR3.46 trillion, supported primarily by a 24.9% YoY reduction in provision expenses. This helped offset weaker topline performance, as operating income slipped 0.9% YoY on the back of softer net interest income (NII) and non-interest income (non-NII), as well as higher operating expenses. On a sequential basis, net profit declined 8.6% QoQ, mainly due to a sharp 33.4% increase in provision expenses.

NIM Compression from Higher Funding Costs

NII fell 4.6% YoY as interest expense climbed 11%, reflecting upward pressure on funding costs. This resulted in net interest margin (NIM) narrowing by 25 bps YoY to 3.96% (1HFY24: 4.21%). The compression was driven by a 54 bps decline in loan yields, while cost of funds (COF) inched up by 3 bps. Nevertheless, management believes COF has peaked at 3.61% in 1QFY25, having eased to 3.46% in 2Q. With the central bank’s policy rate cuts starting to pass through, further COF easing is expected in 2H as deposits reprice lower. Niaga remains confident in maintaining NIM within the 3.9%-4.2% range, underpinned by a 10.9% YoY increase in CASA and a continued pivot away from expensive time deposits (-6.6% YoY).

Broad-Based Loan Growth

Loans expanded by 6.8% YoY, with broad-based growth across segments: Corporate (+9.3%), SME (+7.3%), Consumer (+4.7%), and Commercial (+4.6%). The strong momentum was led by auto loans, which surged 26.7% YoY, alongside healthy growth in unsecured loans and SME lending. Management is guiding for full-year loan growth of 5-7%, supported by increased focus on higher-yielding retail products and deeper penetration into secondary cities.

Stronger Fee-Based Income

Non-NII declined by 1.9% YoY, largely due to a high base effect from a one-off NPL sale in 1HFY24. When excluding the one-off NPL sale, the underlying performance was healthy, with fee and commission income rising by 4.1% YoY and treasury & markets income increasing by 9.5% YoY. Given the structural pressure on NII from elevated funding costs, Niaga is sharpening its focus on diversifying revenue streams. The bank aims to grow its recurring income base by scaling up in areas such as wealth management, auto insurance, and corporate finance solutions. Longer-term, management sees growth being anchored by building a more customer-centric, integrated franchise, deepening client relationships, and leveraging strategic partnerships across key ecosystems.

Asset Quality Remains Stable

Provision expenses improved meaningfully YoY, bringing the cost of credit down to 65 bps (1HFY24: 89 bps). On a QoQ basis, however, provision rose 33.4%, driven by a low base in 1Q (46 bps) and some material MEV adjustment in 2Q. Despite this, asset quality trends remain sound. The gross impaired loans (GIL) ratio improved to 1.88% (from 2.15% in 1HFY24), while Loans at Risk (LaR) and impaired loan coverage stayed relatively stable at 52% and 111%, respectively. Niaga also maintained strong capital and liquidity buffers, with a Tier-I capital ratio of 22.9% and a liquidity coverage ratio (LCR) of 192.6% as at end-1HFY25.

3-Mar-25

Cost Discipline Intact

CIMB Niaga continued to demonstrate strong cost discipline in 1HFY25, with a controlled increase in personnel expenses (+3.6% YoY) and a 4.3% YoY reduction in other expenses. Management remains committed to reinvesting efficiency gains into strategic areas, particularly IT, as the bank accelerates its digital transformation agenda. Investments in technology are expected to rise over the near term, supporting Niaga’s ambition to become a more digital-first bank. Niaga has seen encouraging growth in mobile financial transactions, driven by customers’ preference for a faster, simpler user experience. Key milestones include the growing adoption of digital savings account openings, which enhance onboarding speed and customer satisfaction.

To support this shift, Niaga will continue to restructure its physical network by streamlining branches and ATMs to push more transactions through digital channels. The resulting lower e-channel operating cost and improved efficiency are expected to offset higher IT investments. Despite the near-term cost pressures, management aims to bring the cost-to-income (CTI) ratio down to below 45% by end-2025. For now, CTI rose slightly to 45.5% in 1HFY25 (1HFY24: 43.9%) on the back of negative JAWs.

Potential downside risks

Niaga’s strategic shift toward higher-margin segments such as auto, unsecured, and SME loans has raised the proportion of high-yield loans to 50% of the portfolio as of June 2025, up from 42% in 2019. While this move aligns with the bank’s strategy to enhance long-term margin and risk-adjusted returns, it does increase sensitivity to macroeconomic risks, particularly in the retail segment. Correspondingly, we note that retail special mention and NPL have risen alongside Niaga’s portfolio repositioning. Nonetheless, Niaga expects to manage asset quality within guided levels and is maintaining its full-year credit cost guidance at 60-80 bps.

Niaga contributed approximately 24% of CIMB Group’s pre-tax profit in 1QFY25. However, the recent strength in the Malaysian Ringgit (MYR) against the Indonesian Rupiah (IDR) poses a translation risk to group earnings. Based on sensitivity analysis, a 10% depreciation of the IDR versus MYR could reduce CIMB Group’s PBT by an estimated 2-3%.

Valuation and recommendation

We make no changes to CIMB Group’s earnings forecasts, pending the release of its upcoming results. We maintain CIMB’s TP at RM8.86. Our valuation is based on an implied PBV of c. 1.2x based on the Gordon Growth Model and a 3% ESG premium. Buy reiterated on CIMB.