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* Q4 profit at 854.4 mln ringgit vs 825.7 mln year-ago
* Says continues to focus on bringing down costs
* Cost-to-income ratio drops to 53.9 pct at end of Dec (Recasts with outlook, adds loan growth, share price)
By Sumeet Chatterjee
HONG KONG, Feb 28 (Reuters) - Malaysian lender CIMB Group Holdings Bhd on Tuesday beat expectations with a 3.5 percent rise in fourth-quarter profit and said it was optimistic about business prospects in 2017, based on improved loan growth and lower costs.
The net profit in the December quarter at CIMB, the second-largest lender by assets in Malaysia, was bolstered by an 8.7 percent increase in credit demand in its home market as well as in neighbouring Indonesia and Thailand.
Malaysian lenders including Malayan Banking Bhd (Maybank) , the country's largest lender by assets, and CIMB have benefited from cost cutting and stronger demand for corporate loans in the domestic market.
CIMB's net profit for the quarter ended in December 2016 was 854.4 million ringgit ($192.21 million), up from 825.7 million ringgit a year earlier and beating analysts' average estimate of 805 million ringgit according to Thomson Reuters data.
Maybank last week reported a 43 percent rise in fourth-quarter profit on loan growth and a rise in investment income, and forecast stronger loan growth in its core markets of Malaysia and Indonesia.
Malaysian lenders' earnings prospects for the current year have been aided by the country's improved economic outlook after being hobbled over the past couple of years by slumping oil and gas prices and slowing demand from top trade partner China.
A financial and political scandal at state-fund 1Malaysia Development Berhad (1MDB) has also dented sentiment.
Malaysia's economy grew 4.5 percent in the fourth quarter from a year earlier, ending a year of tepid growth on a stronger note helped by solid exports and resilient domestic demand.
"The group is optimistic for 2017 on the back of sustainable loan growth, continued cost controls and expected improvement in provisions," CIMB said in its earnings statement filed with the stock exchange.
It posted an 11.1 percent rise in bad loans provisions last year from 2015.
The bank's cost-to-income ratio improved to 53.9 percent in 2016, down from 55.6 percent in the year-ago period, bringing it closer to its target of 50 percent by end of next year.
CIMB said in December it had agreed to sell its 18.2 percent stake in China's Bank of Yingkou Co Ltd, valued at 972 million ringgit, to investment holding company Shanghai Guozhijie Investment Development Co. Ltd.
CIMB shares were trading 0.6 percent higher in the afternoon, in a slightly weaker broader market.
$1 = 4.4430 ringgit Reporting by Sumeet Chatterjee; Editing by Stephen Coates