• We maintain our HOLD recommendation on CIMB Group with an unchanged fair value of RM3.30/share based on FY21 P/BV of 0.5x, supported by an ROE of 5.5%.

• CIMB Thai, a 94.83% indirectly held subsidiary of CIMB Group, recorded a weaker net profit of THB306mil or RM41mil in 2Q20 (-71.7% QoQ) driven largely by a decline in non-interest income (NOII) and higher provisions. Allowances for loan losses climbed 66.5% QoQ to THB1.03bil contributed by provisions set aside for a large corporate borrower which we believe was related to the aviation sector.

• 6M20 net profit rose by 115.6% YoY to THB1.39bil (or RM186mil) mainly on stronger NOII. This was supported by fair value gains on financial instruments and higher other operating income. The increase in other operating income was contributed by bad debt recoveries and the impact of adjustments from the adoption of FRS 9 on 1 January 2020.

• Net interest income was flat at THB5.75bil (+1.0% YoY) in 6M20 attributed to a compression in interest margin and subdued loan growth. YTD gross loans declined by 0.3% to THB241.3bil. NIM fell to 3.3% for 6M20 vs. 3.5% in 6M19 owing to lower interest income from investments. 2Q20 saw another cut in Thailand’s policy rate by 25bps on top of the 50bps reduction announced in 1Q20. This brought the year-todate cumulative rate cuts to 75bps, lowering the benchmark interest rate to 0.50%. With inflation in Thailand looking muted in the near term, we do not discount the possibility of another rate cut of 25bps ahead. Recall, the impact on interest margin from rate cuts will be milder in Thailand than Malaysia due to the latter’s longer tenure for deposits.

• JAW was positive for the Thai subsidiary (+4.7%) for 6M20 as the rise in total income (+10.5% YoY) outpaced the growth in opex (+5.8% YoY). CIMB Thai’s CI ratio improved to 59.4% in 6M20 vs. 62.1% in 6M19 underpinned by higher total income and tighter management of expenses.

• Provisions at CIMB Thai decreased by 6.6% YoY to THB1.64bil consequently leading to a credit cost of 1.36% in 6M20.

• CIMB Thai's GIL ratio edged up to 5.8% in 2Q20 from 4.7% in 4Q19 due to a change in NPL classification criteria (stage 3). The loan-to-deposit ratio for CIMB Thai stood at 121.0% while the modified LD ratio was 91.0% in 2Q20.

• CIMB group is scheduled to release its results on 26 August. We expect the group’s 2Q20 earnings to be weak, impacted by further provisions and compression in interest margin. Additional provisions for Singapore and changes in its ECL model from revisions to macroeconomic variables will cause allowances for loan losses to rise.

Source: AmInvest Research - 22 Jul 2020