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Bank CIMB Niaga: Valuation Discount To Peers Is Unwarranted

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About: PT BANK NIAGA TBK A (PTNAF)
by: The Value Pendulum
Summary

Bank CIMB Niaga's lack of scale relative to larger peers is mitigated by strong parental support and the bank's focus on digital banking.

Bank CIMB Niaga is very well-capitalized with a Capital Adequacy Ratio of 21.21%, and asset quality issues are now a thing of the past.

Bank CIMB Niaga trades at 0.58 times P/B and offers a consensus forward FY2019 dividend yield of 3.0%.

Elevator Pitch

Indonesia-listed mid-sized bank Bank CIMB Niaga (OTC:PTNAF) [BNGA:IJ] currently trades at 0.58 times P/B which represents a discount to the stock's historical five-year average P/B of approximately 0.7 times. The bank is also the cheapest stock among the top 10 Indonesia-listed banks on a P/B basis. Bank CIMB Niaga should not trade at a discount to its smaller banking peers, as Bank CIMB Niaga is comparable with these smaller banks in terms of asset size, market capitalization and trailing ROE. Bank CIMB Niaga offers a consensus forward FY2019 dividend yield of 3.0%.

While there are no near-term visible catalysts that could possibly re-rate the stock, there are also no strong reasons for Bank CIMB Niaga to be valued by the market at a discount to its Indonesian banking peers. I assign a "Bullish" rating to Bank CIMB Niaga, and my target price for the stock is IDR1,200 pegged to 0.7 times P/B representing a 20% upside.

Company Description

Incorporated in 1955 and listed on the Indonesia Stock Exchange in 1989, Bank CIMB Niaga merged with LippoBank in 1989 to become the sixth largest Indonesian bank in terms of total assets, after PT Bank Rakyat Indonesia (Persero) Tbk (OTCPK:OTCPK:BKRKY) (OTCPK:OTCPK:BKRKF) [BBRI:IJ], PT Bank Mandiri (Persero) Tbk (OTCPK:OTCPK:PPERY) (OTCPK:OTCPK:PPERF) [BMRI:IJ], PT Bank Central Asia Tbk (OTCPK:OTCPK:PBCRF) (OTCPK:OTCPK:PBCRY) [BBCA:IJ], PT Bank Negara Indonesia (Persero) Tbk (OTCPK:OTCPK:PTBRY) (OTC:OTC:PBNNF) [BBNI:IJ], and PT Bank Tabungan Negara (OTC:PKTBF) [BBTN:IJ].

Consumer banking (mortgage, credit cards, automotive loans and others), MSME (Micro-Small-Medium Enterprise) banking, commercial banking and corporate banking loans comprised approximately 28%, 19%, 37% and 16% of Bank CIMB Niaga's loan book as of end-September 2019.

Bank CIMB Niaga's parent is Malaysia-listed CIMB Group Holdings Berhad (OTCPK:CIMDF) [CIMB:MK] which has a 92.5% deemed interest in the bank. Although the free float of Bank CIMB Niaga's seems small at 7.5%, the three-month average daily trading value of the Indonesia-listed bank is decent at close to $200,000 in USD terms.

Bank CIMB Niaga's Shareholding Structure

Source: Bank CIMB Niaga's 3Q2019 Results Presentation

Strong Parent And Focus On Digital Banking Mitigate Limitations Of Size

Bank CIMB Niaga is small compared to its larger banking peers. Its total assets is approximately a fifth of Bank Rakyat Indonesia's and Bank Mandiri's assets, and a third of Bank Central Asia's and Bank Negara Indonesia's assets. This puts Bank CIMB Niaga at a disadvantage compared with the major Indonesian banks, as size and economies of scale matter a lot in the banking industry. Bank CIMB Niaga also suffers from a lack of scale when it comes to its network coverage. Bank CIMB Niaga has only 392 branches as of end-3Q2019. In comparison, Bank Mandiri operates 2,593 branches and Bank Rakyat Indonesia have over 1,070 branches & sub-branches.

There are three key mitigating factors that keep Bank CIMB Niaga competitive with its larger peers despite the apparent lack of size.

Firstly, Bank CIMB Niaga enjoy strong parental support. CIMB Group Holdings is Malaysia's second largest commercial bank and the fifth largest bank in Southeast Asia with respect to asset size. CIMB Group Holdings is also 1.5 times the size of Indonesia's largest bank Bank Rakyat Indonesia in terms of total assets, and more than seven times as large as its subsidiary Bank CIMB Niaga on the same measure.

Besides its home market, Malaysia, CIMB Group Holdings has operations and business interests in Indonesia, Thailand and Singapore. But Bank CIMB Niaga and Indonesia are the most important overseas growth driver for CIMB Group Holdings, contributing close to a fifth of the Malaysian bank's 1H2019 profit before tax.

Bank CIMB Niaga's parent CIMB Group Holdings brings both intangible and tangible benefits. Intangible benefits include the sharing of best practices between CIMB Group Holdings and Bank CIMB Niaga in areas such as new product development and risk management. Tangible benefits include the ability of CIMB Group Holdings to use its financial strength to potentially support Bank CIMB Niaga, when it comes to specific events such as equity fund raising and major loan defaults by specific clients.

The best validation of the importance of having CIMB Group Holdings as a parent is Bank CIMB Niaga's credit ratings. Bank CIMB Niaga has investment grade credit ratings from both local and international credit rating agencies.

Indonesian credit rating agency Pefindo has stated in a October 2015 article that parent support is key factor that it relies on assessing a banking & finance company's credit rating. In August 2018, Fitch Ratings downgraded the long-term foreign currency issuer default rating of Bank CIMB Niaga to BBB- from BBB, because Fitch revised its view of CIMB Group Holdings. Fitch also highlighted that its credit ratings for Bank CIMB Niaga take into account the fact that "the lender (Bank CIMB Niaga) would be highly likely to receive extraordinary support from CIMB Group, if needed, given its strategic importance to the group's Southeast Asian franchise."

Bank CIMB Niaga's Credit Ratings

Source: Bank CIMB Niaga's 3Q2019 Results Presentation

Secondly, Bank CIMB Niaga has been one of the pioneers in digital banking in Indonesia, and physical banking branches are becoming increasingly less important in today's connected world.

Bank CIMB Niaga first launched its mobile banking application called Go Mobile in 2012, and Go Mobile continues to gain traction. The number of Go Mobile users grew +20.8% YoY from 2.077 million in 3Q2018 to 2.510 million in 3Q2019, while the number of transactions executed on Go Mobile increased by +142.1% from to 3.873 million to 9.376 million over the same period.

Similarly, Bank CIMB Niaga's online banking or internet banking portal, CIMB Clicks, saw YoY growth rates of +12.1% and +8.3% for the number of users and the number of transactions in 3Q2019. CIMB Clicks was launched in 2010; other digital banking initiatives include the introduction of an e-wallet banking account called "Rekening Ponsel" in 2013 and a virtual credit card "Wave n Go" in 2015.

Another banking innovation by Bank CIMB Niaga is Digital Lounges which are located in 16 strategic locations in major malls in Indonesia. The Digital Lounges are open every day (including public holidays) between 10:00 am and 9:00 pm, and are staffed with a Digital Banking Manager and multiple ATMs. Bank CIMB Niaga's customers can visit Digital Lounges to open new banking accounts, apply for credit cards, register for internet (CIMB Clicks) & mobile banking (Go Mobile), and get referrals for mortgage, car loan, and personal loans applications.

Bank CIMB Niaga's Digital Lounge

Source: Bisnis

Go Mobile, CIMB Clicks and Digital Lounges are part of Bank CIMB Niaga's branchless banking strategy.

Thirdly, Bank CIMB Niaga is currently only one of only five banks alongside Bank Rakyat Indonesia, Bank Mandiri, Bank Central Asia and Bank Negara Indonesia to be included in the BUKU IV category of banks. Bank CIMB Niaga was included in the BUKU IV category of Indonesian banks because its core capital exceeds IDR30 trillion. This implies fewer regulatory restrictions for Bank CIMB Niaga with respect to product range and deposit rate cap, which allows it to compete with the major banks.

Bank Is Well-Capitalized And Asset Quality Remains Decent

Despite its lack of size relative to the major Indonesian banks, Bank CIMB Niaga is well-capitalized and asset quality is decent,

Bank CIMB Niaga's Capital Adequacy Ratio or CAR was 21.21% and its Tier-1 Capital Ratio was 19.96% as of end-September 2019. This also represented an improvement from FY2018, when Bank CIMB Niaga's CAR and Tier-1 Capital Ratio were 19.2% and 18.0% respectively.

At the bank's 3Q2019 earnings call on October 31, 2019, Bank CIMB Niaga acknowledged that a CAR above 20% seems excessive and a CAR in the mid-teens would have been more appropriate. In other words, Bank CIMB Niaga is very well-capitalized, to the point of being over-capitalized.

Asset quality used to be an issue for Bank CIMB Niaga in the past, but the bank's asset quality has improved tremendously over the past few years.

Bank CIMB Niaga's Non-Performing Loan or NPL ratio was above 4.0% in FY2015 and FY2016, as the bank was too aggressive in driving loans growth between 2011 and 2013, particularly to commodity-related companies. Between 2015 and 2016, when Indonesia's economy weakened and commodity prices collapsed, Bank CIMB Niaga's NPL ratio went through the roof. The bank appointed Mr Tigor M. Siahaan as President Director in June 2019, and he has managed to clean up the books.

The bank's NPL ratio was 2.62% in 3Q2019, versus 2.87% in 2Q2019 and 3.41% in 3Q2018. Loan loss coverage also improved from 101.24% and 101.20% in 3Q2018 and 2Q2019 respectively to 111.86% in 3Q2019.

On the flip side, Bank CIMB Niaga's cost of credit increased from 1.4% in 2Q2019 to 1.6% in 3Q2019, possibly due credit quality with specific borrowers in this weak economic environment. Bank CIMB Niaga also has exposure to loss-making state-owned steel producer Krakatau Steel, which has recently entered into a debt restructuring agreement with six banks, which did not include Bank CIMB Niaga, in October 2019. But Bank CIMB Niaga has clarified at the bank's recent 3Q2019 earnings call that it has signed an actual agreement with Krakatau Steel and it is currently involved in ongoing discussions with the steel company on restructuring terms. The bank also stressed that "asset quality is expected to remain a key focus" with "prudent asset expansion" in 4Q2019 and 2020.

Revenue And Cost Drivers To Support Future Earnings Growth Remain Intact

Bank CIMB Niaga's core net profit, excluding one-off expenses relating to its employee early retirement scheme referred to as Mutual Separation Scheme or MSS), grew by a strong +13.7% YoY in 9M2019.

Bank CIMB Niaga achieve a total loans growth of +4.9% YoY in 3Q2019, with key drivers being the Mortgage (+12.6%), Credit Cards (+11.3%), Corporate (+8.3%), and SME (+4.1%) segments. The mortgage and credit cards segments tend to deliver fairly stable growth, while Bank CIMB Niaga's corporate loans segment received a boost from the resumption of certain infrastructure projects that were delayed last year. Bank CIMB Niaga's digital banking initiatives should continue to drive credit card growth, and the bank will continue to place a strong emphasis on referrals from property agents and real estate developers as a source of new mortgage loans. Automotive loans could be the bright spot for Bank CIMB Niaga in 4Q2019 and 2020, as they grew QoQ for the second consecutive quarter in 3Q2019, despite a -8% YoY decline.

With respect to cost optimization, Bank CIMB Niaga's cost-to-income ratio continued to decline from 50.03% in 3Q2018 and 49.40% in 2Q2019 to 48.92% in 3Q2019. Cost reduction initiatives include a continued shift towards digital banking, physical branch consolidation, more efficient utilization of older buildings, optimizing back office functions and carpooling for staff among others.

Also, Bank CIMB Niaga's employee early retirement scheme or MSS resulted in a 7%-8% reduction in its workforce, and associated cost savings will start to be reflected in the company's financial numbers by March or April 2020. The payback period for the compensation relating to the MSS is expected to be 18 months.

In other words, Bank CIMB Niaga is becoming leaner, and there are revenue and cost drivers to support double-digit earnings growth for 2020.

Valuation

Bank CIMB Niaga trades at 0.58 times P/B based on its share price of IDR990 as of November 5, 2019. This represents a discount to the stock's historical five-year average P/B of approximately 0.7 times.

Indonesia's Top 10 Listed Banks In Terms Of Asset Size

Stock Total Assets (USD millions) Market Capitalization (USD millions) Trailing 12 Months ROE P/B
Bank Rakyat Indonesia (Persero) Tbk PT 93,062 36,207 18.2% 2.58
Bank Mandiri (Persero) Tbk PT 90,924 22,639 14.7% 1.63
Bank Central Asia Tbk PT 63,692 54,584 18.1% 4.61
Bank Negara Indonesia (Persero) Tbk PT 58,109 10,034 14.1% 1.20
Bank Tabungan Negara (Persero) Tbk PT 22,272 1,353 11.4% 0.78
Bank Cimb Niaga Tbk PT 18,733 1,756 8.8% 0.58
Bank Pan Indonesia Tbk PT [PNBN:IJ] 15,158 2,251 8.9% 0.80
Bank Danamon Indonesia Tbk PT (OTC:PBDBY) (OTC:PBDIF) [BDMN:IJ] 13,958 2,959 7.0% 0.97
Bank BTPN Tbk PT (BTPN:IJ] 12,989 1,828 9.7% 0.86
Bank Maybank Indonesia Tbk PT [BNII:IJ] 12,676 1,149 7.4% 0.64

Source: Author

As per the peer comparison table above, Bank CIMB Niaga is the cheapest stock among the top 10 Indonesia-listed banks on a P/B basis. Bank CIMB Niaga could be justified trading at a discount to its larger peers such as Bank Rakyat Indonesia and Bank Mandiri due to its smaller asset size. But Bank CIMB Niaga should not be valued at a lower P/B ratio compared with its smaller banking peers like Bank Pan Indonesia and Bank Maybank Indonesia, as Bank CIMB Niaga is comparable to these smaller banks with respect to asset size, market capitalization and trailing ROE.

Bank CIMB Niaga offers a trailing dividend yield of 2.8% and a consensus forward FY2019 dividend yield of 3.0%.

Variant View

The key risk factors for Bank CIMB Niaga are a deterioration in asset quality, lower-than-expected loans growth and a higher-than-expected cost-to-income ratio.

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.