Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value of RM5.80/share based on FY22 ROE of 9.5%, leading to a P/BV of 0.9x. We continue to see improving fundamentals supported by higher revenue and lower provisions moving forward while the planned cost take-out of RM300–500mil in FY21–FY22 is expected to lower the group’s CI ratio. The stock has benefitted from foreign fund inflows with a higher foreign shareholdings of 23.6% in Sep 2021 vs. a low of 20.3% in May 2021. Despite the recent run-up in its share price, total returns (including dividends) remain >10.0%. No changes to our earnings estimates for now.

• CIMB provided updates on the group through a virtual meeting yesterday.

• Recall, the full lockdown (MCO 3.0) began on 1 June 2021. From 16 Aug 2021 onwards, restrictions in movements and operation of businesses were relaxed. This allowed more economic sectors to operate with the capacity of operations based on vaccination rates of employees.

• Despite the lockdown, we understand that the group’s asset quality in Malaysia remained stable. Asset quality for commercial and corporate loans has been holding up with no significant deterioration in repayment capacity. The outlook on asset quality has improved with the reopening of the economy after Malaysia achieved a vaccination rate of 90.0% for the adult population.

• As for the take-up of loan repayment assistance (moratorium and R&R) for the group as whole, it was sustained at 21.0% of CIMB’s total loans. July 2021 saw the peak with 27.0% of the total Malaysia consumer loans in moratorium and R&R while 44.0% of the total domestic commercial loans were under payment relief assistance. Since then, the percentages have remained steady (consumer loans: <30.0% and commercial loans: an increase of only 1–3% from 44.0%).

• In Indonesia and Thailand, the percentages of loans in moratorium and R&R have tapered. Indonesia saw a slight increase in consumer loans requiring payment relief assistance but was offset by the decline in commercial loans requiring moratorium and R&R.

• Over in Thailand, both percentages of consumer and commercial loans requiring repayment assistance have moderated.

• Meanwhile, in Singapore, loans under the moratorium and R&R have remained stable.

• On the loan repayment support programme (URUS) to B50 borrowers (borrowers with income <RM5,880/mth), the take-up rate is expected to be low.

• Management has not provided any guidance on the impact on mod loss and the loss of interest income from the 3-month interest waiver of the URUS programme. We expect the impact to be milder than our earlier projection of RM121mil for the 3-month interest waiver. Stringent parameters have been put in place for eligible applicants. These included verification by banks to ensure that the applicants are either unemployed or have suffered a 50.0% reduction in monthly salary as well as the requirement that they need to be in any form of repayment assistance programme (TRA, Pemerkasa, Pemulih, bank’s R&R or others) before 1 October 2021. We understand that the percentage of B40 consumer loans in moratorium and R&R eligible for URUS will be circa half of the 27.0% Malaysia consumer loans that are under the repayment assistance programme as of 31 July 2021.

• 3Q21 is likely to see a further top-ups in management overlays for loans that have taken up the Pemulih moratorium launched on 7 July 2021. Applications for URUS will be open from 15 Nov 2021 to 31 Jan 2022 and some of the loans under CIMB’s existing repayment assistance programme will be migrated to URUS. 4Q21 could still see some additional provisions for borrowers opting for the URUS programme but not significant in amount as management overlays for loans to higher risk B40s under the repayment assistance have already been largely provided for in the earlier quarters.

• No change to credit cost guidance of 80–90bps at group level for FY21. Domestic SME loans remained well collateralised with low LGD (loss given default). We gather that RM40mil provisions have been set aside for SME loans with a further top-up likely in 3Q21. Management alluded to the additional top-up in management overlays in 3Q21 being partly cushioned by the write-back in provisions from a recovery of one domestic loan related to the sugar industry. Meanwhile, credit cost in Indonesia will continue to stay elevated in the near term.

• On the conservative side, the group has classified R&R loans to higher risk B40s to stage 2. Management is now contemplating whether or not to classify loans where borrowers have applied for multiple R&Rs (>2–3times) to stage 3 from 2.

• Meanwhile, loan momentum has started to improve in Sep 2021, and 4Q21 is poised to see improvement in financing growth. Malaysia has witnessed better consumer loans traction (mortgage and HP). Also, in Indonesia, growth of consumer, SME and business banking loans has picked up pace.

• The group is scheduled to release its 3Q21 results on 30 Nov 2021. 3Q21 reported earnings are expected to be softer QoQ attributed to slower loan demand from the lockdown in Malaysia, mod loss from the take-up of Pemulih moratorium. Also, additional top-ups in management overlays from the take-up of loan repayment assistance coupled with a lower trading income QoQ are expected with the 10-year MGS yield continuing to climb.

• Our valuation is already been based on FY22 numbers. Potentially, higher interest rates are in the cards for Malaysia in 2H2022. Typically, a 25bps OPR rate hike will translate into a NIM expansion of 2–3bps, and additional RM80mil in interest income for the full FY. Additionally, interest rates in Indonesia and Thailand are also likely to be hiked moving forward. We see write-backs in management overlays as likely in 2H2022. However, this will take place only when there is a better clarity on the containment of the pandemic with no further lockdown measures disrupting borrowers’ repayment capacity.

Source: AmInvest Research - 21 Oct 2021