Investment Highlights

• We maintain our BUY recommendation on CIMB Group Holdings (CIMB) with an unchanged fair value of RM5.50/share based on FY22 ROE of 9.0%, leading to a P/BV of 0.9x. We make no changes to our earnings estimate for now. We have assigned a 3-star ESG rating to the company (Exhibit 1).

• Recall in the 4Q20 results briefing, loans that were under moratorium as well as restructuring and restructuring (R&R) accounted for 15.0% of the group’s total financing. We gather from management in a recent update that the percentage has now declined slightly. This was contributed largely by the expiry of assistance programmes in Indonesia and Thailand, coupled with the slowdown in requests for targeted assistance in Singapore. In Malaysia, applications for targeted assistance by consumer borrowers have been stable. Nevertheless, the overall percentage of targeted assistance for domestic loans was still slightly higher due to reliefs on repayments for corporate borrowers.

• Overall, some improvements in the ability to service payments were seen in Indonesia, Thailand and Singapore. This is based on the decline in the need for repayment assistance.

• Credit cost guidance for FY21 has been maintained at 80– 90bps, lower than FY20’s credit cost (based on loans) of 146bps. 1Q21 will likely see some provisions taken for unsecured loans in Indonesia. The group has already prudently set aside RM1.5bil in provisions through macroeconomic factor adjustments (MEF) and overlays in FY20. This should ease pressure from any increase in credit risk from the resurgence in Covid-19 cases.

• On a comforting note, provisions of circa RM731mil taken for bonds in FY20 are adequate and unlikely to be repeated in FY21.

• In 1Q21, the group’s trading income will be decent with strong performance in Jan and February, albeit partly offset by lower transactions in March. The surge in MGS yields is certain to impact the group’s FVOCI reserves negatively in 1Q21. However, the impact to capital will not be material due to the group’s lower FVOCI reserves than its peers. 2Q21 QTD has seen MGS yields declining and this should see a recovery in FVOCI reserves.

• In CIMB Thai’s recently released 1Q21 results, provisions have trended higher YoY. This was due to provisions taken for commercial loans in line with the exit strategy for commercial banking business in Thailand, coupled with provisions on Covid-19 related sectors. Also, contributing to the increase was the non-repeat of write-backs in 1Q20 through FRS 9 enhancements.

• 1Q21 loan growth is expected to remain muted though Malaysia’s consumer loans had expanded. The group’s loans were dragged by the exit of commercial loans in Thailand and the contraction of commercial banking loans in Indonesia.

• The group’s NIM is likely to improve in 1Q21 contributed by efforts to optimise funding cost, CASA expansion and some pick-up in asset yields in Malaysia and Indonesia.

• In the Philippines, micro loans were introduced from 2Q20 with a straight-through digital end-to-end process. We gather that the yields for these loans were high with asset quality tracking along management’s expectation. The volume for micro loans has been high in the Philippines.

• Plans are underway to raise funding for Touch ‘n Go with the build-up of ecosystem almost complete through the acquisition and retention of customers. Recently, Touch ‘n Go launched its money market fund and there are plans to launch more products for value creation. Any potential rise in the value of the entity will be a plus to the valuation of the group as well as providing the opportunity to monetise the gains from this investment.

• On the potential write-off of goodwill and intangible assets that will eventually lift the group’s ROE, this exercise is still under review. Management hinted that the impairment will most likely be carried out in 2 stages, the first in 2H21 (larger portion) and second in FY22. This will allow the group to still record profits in both financial years after impairing the goodwill and intangible assets.

• The group is targeting to release its 1Q21 results on 31 May. Meanwhile, CIMB Niaga’s 1Q21 results are scheduled to be released on 29 April.

Source: AmInvest Research - 26 Apr 2021