Management’s tone was cautious yesterday and little FY20 guidance was given, amid Covid-19 uncertainties. The most painful update was there will be huge chunky oil & gas allowances ahead. Hence, we cut our FY20/21 profit forecasts by 19%/4%. While the flurry of bad news from its oil & gas exposure does not help sentiment, we would rather see the elephant in the room being addressed this year followed by a sharp V-shape recovery in FY21. We still like CIMB for its inexpensive valuations (trading >-2SD P/B and below GFC’s level). Retain BUY but with a lower GGM-TP of RM4.45 (from RM4.70), based on 0.72x FY21 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 1Q20. Overall, management sounded cautious and little guidance was given for FY20 financials amid Covid-19 uncertainties.

More O&G provision top-up. The oil & gas loan portfolio, which makes up 2.3% of total lending is set to drag bottom-line (30% of this are impaired and loss coverage is 80%). So far, we gathered 2 accounts here got hit by fraud and seem unsalvageable. Hence, CIMB intends to provide 100% loss for both bad loans (one in 1Q20 and the other likely in 2Q20); from our channel checks, these could amount close to RM1b.

Covid-19 updates. CIMB indicated 5.4% of its loans are directly affected by Covid-19 and if indirect ones are also being considered, it could swell up to 21%. We note 90% of eligible customers for the 6-month automatic loan deferment (consumer and SMEs) opted for the moratorium, while for corporate borrowers, 20% of them sought for it.

Slower loans growth ahead. Loans growth in FY20 is seen to slow to low single digit (4Q19: +6.7%) vs earlier guidance of 6%. Geographically, CIMB expects its Malaysian operations to register loans growth of low single digit (due to the availability of some mortgage pipeline) while Indonesia there may be a slight contraction.

NIM to decline more than 10bp. From the previous NIM expectation of falling 5-10bp in FY20 (seeing only 2 OPR reduction during the year), management now thinks it will compress slightly more than that due to another 50bp OPR cut; the range should not double because of quicker deposit repricing coupled with benign competition.

Subdued NOII. 1Q20 non-interest income is poised to be weak due to volatile MGS market. Also, investment banking activities were sluggish. However, fee income from wealth management business held up fairly well.

Still aiming to pay dividends. CIMB looks to maintain its payout ratio at 40-50% but may reverse its earlier plan to lower the electable portion of its dividend reinvestment scheme to conserve cash and capital.

Forecast. We lower our FY20/21 earnings forecasts by 19%/4%, after revising up our net credit cost assumption to 80bp/58bp (from 51bp/54bp); this comes on the back of the provisioning top-up for the 2 bad oil & gas loans mentioned above. Separately, we introduce our FY22 estimates.

Retain BUY but with a lower GGM-TP of RM4.45 (from RM4.70), following our profit cut and based on 0.72x FY21 P/B (from 0.77x) with assumptions of 7.3% ROE (from 7.5%), 8.9% COE and 3.0% LTG. This is largely in line to the sector’s 0.76x 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. While the flurry of bad news from its oil & gas exposure does not help sentiment, we are comforted the balance performing loans in this book is only c.1%. Since FY20 is already challenging, we would rather see the elephant in the room being addressed this year followed by a sharp V-shape recovery in FY21.

Source: Hong Leong Investment Bank Research - 29 Apr 2020