Investment Highlights

• We maintain HOLD on CIMB Group Holdings (CIMB) with an unchanged fair value of RM4.10/share based on an FY21 ROE of 5.8%, leading to a P/BV of 0.7x. We make no changes to our earnings estimate for now.

• We gathered from management’s updates yesterday that provisions will stay elevated in 4Q20. This has been contributed largely by additional provisions booked as management overlays and through changes to macroeconomic variables (MEVs) in overseas markets (Singapore, Indonesia and Thailand) and Malaysia. In Malaysia, the additional prudential provisions were taken to reflect new data and the assistance/relief programmes announced in 4Q20 after the blanket automatic moratorium ended in Sept 2020.

• Recall that in 3Q20, the group has set aside additional provisions of RM250mil in Indonesia for borrowers related to the steel industry and RM200mil for Singapore’s legacy accounts related to the FPSO segment. In 4Q20, there will be provisions taken for sectors directly impacted by Covid-19 in Indonesia, Singapore and Malaysia. Nevertheless, the business as usual (BAU) provisions (top-ups in allowances for loan losses in Indonesia and Singapore) will be lower in 4Q20 compared to 3Q20. Also, there will be provisions on unsecured loans in Malaysia and auto loans in Thailand. On a comforting note, these additional provisions in Malaysia and Thailand will not be significantly high.

• Management has 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 140–150bps.

• Aside from provisions for loan losses, 4Q20 is also likely to see provisions taken on other expected credit losses. This will include provisions of circa RM350mil, which will be similar to that taken for bonds related to the oil & gas sector in 3Q20. Management hinted on the adequacy of the provisions for its exposure to bonds related to the oil & gas sector. This should lead to lower provisioning for bonds moving forward.

• Adding to the provisions, the group has allocated allowances for expected credit losses on its derivatives exposure.
   
• NIM is likely to improve marginally in 4Q20, contributed by better interest margins in Singapore from management funding cost (optimising FDs and savings deposits) and the non-repeat of one-off adjustments for CIMB Thai in 3Q20. Meanwhile, interest margins in Malaysia and Indonesia have been stable. Management is guiding for no rate cut in FY21 for now but sees some downside risk to this expectation.
   
• In 4Q20, the group’s trading income will be slightly lower than 3Q20, contributed by the drop of transactions in Dec 2020.
   
• The group remains on track to reduce operating expenses by RM500mil in FY20 despite some increase QoQ in overheads in 4Q20 from higher IT, marketing and administration spending.
   
• Loans to the B40 accounted for a mid-teen percentage of the Malaysian retail loan book. Thus far, only 20% of the B40 borrowers have taken up restructuring & rescheduling (R&R) and they make up a low single-digit percentage of the total retail loans in Malaysia. On the percentage of loans that are under moratorium and R&R for Singapore and Indonesia, we gather that it has not changed much materially from the 6% and 16% of the total loans in the respective countries that was disclosed in Nov 2020. The group’s overall loans that are under the targeted assistance programme (TAP) and R&R are still way lower than 20%. 
   
• Group CET1 ratio is likely to be slightly higher in 4Q20 vs. 3Q20’s 12.9% and the group remains prudent on its capital position. With the capital accumulation and net profit for FY20, the group is maintaining its dividend payout of 40–50% for FY20. On the final dividend, which is likely to be announced together with the 4Q20 results, the portion allowed for reinvestments into additional shares at the discretion of the shareholders under the DRP will be larger. We have pencilled in a dividend of 8.9 sen/share (payout: 50%) for FY20 and we expect the DPS to be lower in quantum for the financial year compared to FY19’s 26 sen/share (payout: 56%).
   
• The group is targeting to release its 4Q20 results on 26 February. Meanwhile, CIMB Niaga’s 4Q20 results are scheduled to be released on 19 February.

Source: AmInvest Research - 27 Jan 2021