Investment Highlights

• We maintain HOLD on CIMB Group Holdings (CIMB) with a revised fair value of RM3.10/share (previously: RM3.30/share) based on a lower FY21 ROE of 4.9%, leading to a P/BV of 0.5x. We trim our FY20/21 net profit by 28.5%/12.2% to reflect higher credit cost of 1.20%1.00%.

• CIMB reported a weaker 2Q20 core net profit of RM489mil (-3.7% QoQ) after stripping out the RM212mil modification loss from loan moratorium.

• 6M20 core net profit came in at RM997mil (-59.3% YoY). It was below expectations, accounting for 35.9% and 36.0% of our and consensus estimate. The weaker earnings were due to lower NOII (drop in fee and trading income), coupled with higher provisions. The group delivered a low ROE of 3.6%.

• The group's gross loans growth remained modest at 3.9% YoY vs. 3.8% YoY in 1Q20. Expansion of loan book was supported by growth in consumer (mainly mortgage loans) and wholesale banking while commercial banking loans contracted. Malaysia loans grew 4.8% YoY, still ahead of the industry growth of 4.1% YoY.

• Underlying NIM, excluding the modification loss, was compressed by 7bps YoY to 2.39% for 6M20 due the consecutive rate cuts in Malaysia. This was within the 10– 15bps compression guidance for FY20.

• Opex for 6M20 declined by 3.3% YoY due to lower marketing as well as general and admin expenses. Underlying CI ratio for 6M20 was 54.0%.

• 2Q20 saw additional provisions for the group (RM500mil for another defaulted oil trader’s loan in Singapore under its wholesale banking which we believe to be Hin Leong, RM470mil from changes in the expected credit loss (ECL) model from revisions to macroeconomic variables coupled with RM98mil for Covid-19 impact). 6M20 credit cost on annualised basis came in at 134bps, exceeding the group’s FY20 guidance of 100–120bps.

• CIMB’s overall GIL ratio rose further to 3.61% from 3.43% in the preceding quarter underpinned largely by the increase in loan impairments regionally (Singapore, Indonesia and Thailand).

• No interim dividend has been proposed and decision on its dividend payout ratio will be made at the end of FY20.

Source: AmInvest Research - 1 Sept 2020