Investment Highlights

• We maintain HOLD on CIMB Group Holdings (CIMB) with an unchanged fair value of RM3.10/share based on an FY21 ROE of 4.9%, leading to a P/BV of 0.5x. We make no changes to our earnings estimates.
• Management provided further updates on the group yesterday.
• We understand that in 3Q20, provisions remained elevated. Further provisions (management overlay) have been set aside for all the key markets. The group has taken further conservative provisions on a forwardlooking basis in Malaysia based on the increase in credit risk following the targeted assistance programme (TAP). Over in Singapore and Indonesia, provisions have been topped up for certain legacy loans. By segment, provisions for consumer loans in Malaysia were more than that of the other countries. Meanwhile, for non-retail loans, the group is closely monitoring a few borrowers that under the sectors directly impacted by Covid-19.
• The impact on asset quality remains uncertain from the recent implementation of the CMCO in Malaysia and lockdown in Indonesia.
• Management maintained its cumulative credit cost guidance of 150–200bps for FY20 and FY21. For FY20, the group continued to guide for a credit cost of 120–140bps. This has taken into account credit cost of 40–60bps, 250– 280bps and 150bps for Malaysia, Indonesia and Thailand respectively.
• Recall in 2Q20, loans in Malaysia that were under moratorium and restructuring and rescheduling (R&R) were 66.0% of the total domestic loans. Post-moratorium, the percentage of Malaysia loans that are under R&R and TAP was only 10.0%. By percentage, circa mid-single digit of its Malaysia consumer loans and a low-single digit of the domestic commercial and corporate loans are under R&R and TAP.
• In 2Q20, the group’s total loan exposure to the aviation sector was 0.3%. In the recent months, the exposure has remained stable.

• CIMB has RM9.7bil in total of goodwill and intangible assets contributed by its past acquisitions of banks and securities firms which locked up its capital. The group is considering to write-off a portion of the goodwill to lift its ROE. The write-off in goodwill (if any) will not occur in FY20. We believe that any benefits to the ROE from the write-off in goodwill will come at the expense of dampening the group's earnings first.
• Management continued to guide for a NIM compression of 10–15bps in FY20. In 3Q20, the underlying NIM in Malaysia has been stable. On a reported basis, Malaysia’s NIM improved QoQ with the absence of modification loss in 2Q20 while CASA continued to grow. Over in Singapore, we gather that interest margin has improved due to repricing of deposits, and this trend is likely to continue into 4Q20. In contrast, Indonesia’s NIM in 3Q20 was compressed attributed to lagged adjustments to rate cuts. Nevertheless in 4Q20, the compression in interest margin will be milder in Indonesia. 
• In 3Q20, NOII is likely to be decent, supported by Malaysia’s fee and trading income.
• Under the Forward 23+ strategy, the target is to reduce operating expenses by RM500mil in FY20 with a cost take out of RM800mil–RM1bil eventually to be achieved by FY22. To lower cost, the group has frozen hiring and will be optimising its marketing expenses. There remains a gap for now to reach a cost take-out of RM800mil– RM1bil by FY22. Among the plans for cost reduction are: i) the exit of commercial banking business in Thailand which will reduce cost in FY20 and FY21; ii) lower back-end cost and the reshaping of commercial business in Singapore; and iii) cost savings from Indonesia’s commercial banking business.
• The group is targeting to release its 3Q20 results on 24 November. Meanwhile, CIMB Niaga’s 3Q20 results are scheduled to be released on 6 November.

Source: AmInvest Research - 28 Oct 2020