How CIMB Niaga will be affected by tightening liquidity

Analyst reveals two possible risks.

According to Macquarie Research, recent action by the Bank Indonesia to tighten liquidity prompts them to consider the impact on CIMB Niaga, the 98%-owned Indonesian subsidiary of CIMB Group.

In Macquarie's view, CIMB Niaga’s main risks from tightening liquidity are 1) its relatively weak CASA deposit base relative to the major Indonesian banks, which puts its funding costs at the mercy of the rising rate cycle, and 2) a likely decline in securities trading gains starting in 2H13.

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Separately, we are still worried about the bank’s mining exposure, but ironically this issue may have emerged at a good time, as management has cooled CIMB Niaga’s previous asset growth trajectory since 2Q12 and has worked to build up a better liquidity position.

Thus, we are not suggesting a crisis scenario for CIMB Niaga. Indeed, management has already moved to improve the bank’s liquidity position since 2Q12, which was prescient and which we consider to be a silver lining surrounding the thunder cloud of exposure to the mining industry in Indonesia.

We simply believe that operating conditions in 2H13 will be more difficult for the Indonesian subsidiary.

Having said that, we note that in our view, both CIMB Niaga and CIMB Group should post reasonably strong results in the upcoming 2Q13 financial statements. CIMB Niaga is set to report on July 29, and we expect a net profit of IDR1.1trn.

CIMB Group is likely to report in the second half of August, and we forecast earnings of RM1,141m, up 6% YoY. The full impact of the tighter liquidity in Indonesia may not be seen until 3Q13 results.

We thus retain our Underperform call on CIMB MK, with a target price at RM7 for total TSR of -16% on a 12-month view.