CIMB Thai’s 1Q20 core earnings quadrupled YoY, largely meeting expectations. The strong showing was thanks to positive Jaws and lower loan loss provision. Also, net loans growth held up firmly at 7.4% YoY. That said, asset quality has started to wane and its NPL ratio has also spiked up 70bp sequentially. All in all, our forecasts are unchanged. We still like CIMB for its inexpensive valuations (trading at more than -2SD P/B and below global financial crisis level) and offers attractive dividend yield of 6-7%. Retain BUY and GGM-TP of RM4.70, based on 0.77x 2021 P/B.

Largely in-line. Excluding NPL sale gains in 1Q & 4Q19, CIMB Thai (95%-owned) posted 1Q20 core earnings of THB1.1b (+2-fold QoQ, +4-fold YoY). This was largely in line with our and consensus estimates, making up 39-41% of full-year forecasts (we believe loan loss provision will rise further in subsequent quarters due to impact from Covid-19 crisis); its contribution to overall group’s PBT is minimal (<10%).

QoQ. Core profit doubled, thanks mainly to positive Jaws as top-line grew strongly by 18% vs an opex decline of 6%; non-interest income (NOII) jumped 60% given huge mark-to-market (MTM) and investment gains. Also, net interest margin (NIM) widened 3bp. However, higher allowance for bad loans (+2-fold) capped earnings from growing quicker.

YoY. The quadrupling of core net profit came on the back of positive Jaws and lower impaired loan provision (-39%). Again, top-line growth was strong (+23%), led by NOII (+2-fold) as it booked in stellar MTM and investment gains. However, this helped to mask the adverse effect of NIM slippage (-14bp).

Other key trends. Net loans growth held up firmly at 7.4% YoY (4Q19: +7.3%) while deposits grew 13.4% YoY (4Q19: +7.5%). In turn, sequential net loan-to-deposit ratio fell 6ppt QoQ to 111%. As for asset quality, gross NPL ratio shot up 70bp QoQ to 5.3% due to a change in NPL classification criteria.

Outlook. NIM compression at CIMB Thai is seen to linger on the back of the plan to switch to lower-yielding but safer assets. Also, the Bank of Thailand has cut key policy rate by 2x (so far this year) to 0.75%. Cost-wise, personnel expenses will continue to stay at elevated levels, owing to its Fast Forward expansion strategy. Besides, asset quality is set to deteriorate further given ongoing Covid-19 crisis; hence, provisioning level for bad loans is expected to rise. That said, we will get more updates from the pre-closed period meeting with management next week.

Forecast. Unchanged as CIMB Thai’s 1Q20 results were largely within expectations.

Retain BUY and GGM-TP of RM4.70, based on 0.77x 2021 P/B with assumptions of 7.5% ROE, 8.9% COE, and 3.0% LTG. This is largely in line to the sector’s 0.79x but below its 5-year mean of 0.96x; the valuation is fair given its similar ROE output to peers but 1ppt below historical average. Overall, we think most of the negatives have been priced in (trading at more than -2SD P/B and valuation is below global financial crisis level of 1.02x). Hence, it provides one of the best values (pricing-wise) among larger banks. Besides, it is offering attractive dividend yield of 6-7%.

Source: Hong Leong Investment Bank Research - 22 Apr 2020