CIMB’s 1Q20 core net profit fell 57% YoY as loan loss provision tripled. Besides, NIM slipped sequentially, loans growth tapered, and asset quality deteriorated. Overall, results missed expectations and with CIMB sharing poorer indicators ahead, we cut FY20-22 profit by 9-30%. Despite inexpensive valuations, we turn less bullish on CIMB as asset quality has substantially wane d and there will be heavier provisioning ahead. Also, we are uncomfortable that CIMB is the only bank so far zeroizing its regulatory reserves. Reduce to HOLD and with a lower GGM-TP of RM3.60 (from RM4.45), based on 0.61x FY21 P/B.

Below expectations. Excluding one-time disposal gain (in 1Q19) and intangible asset write-off (in 4Q19), CIMB recorded 1Q20 core earnings of RM508m (-51% QoQ, -57% YoY). This missed expectations, making up only 13-14% of both our and consensus full-year forecasts; we see loan loss provision climbing further in subsequent quarters due to the impact of Covid-19 crisis.

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core profit fell 51%, no thanks to weak total income (-8%) and higher bad loan allowances (+60%). At the top, net interest margin (NIM) compressed 9bp due to the multiple regional rate cuts, while non-interest income (NOII) declined 28% on the back of weaker fees and forex losses.

YoY. The tripling of loan loss provision, led to core bottom-line decrease of 57%. Total revenue came in flattish as the poor NOII (-21%) erased the better net interest (+5%) and Islamic banking income (+12%); the items that dragged NOII were again weaker fees and forex losses.

Other key trends. Both loans and deposits growth momentum slowed to 3.8% (4Q19: +6.7%) and 4.5% YoY (4Q19: +6.4%) respectively. However, the sequential loan-to deposit ratio (LDR) was still at an elevated level of 93% (flat QoQ). For asset quality, gross impaired loans (GIL) ratio jumped 36bp QoQ to 3.43% given that new bad loan formation doubled QoQ and YoY.

Outlook. NIM pressure is seen to persist into following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is expected to taper even further. Besides, asset quality is poised to weaken but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6- mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired. That said, there will be another lumpy O&G fraudulent-related provision in 2Q20, estimated to be close to RM500m.

Forecast. Seeing 1Q20 results were below expectations and management guiding for weaker 2020 financial performance, we cut FY20-22 profit by 9-30% to factor in higher NIM slippage and net credit cost assumptions.

Reduce to HOLD (from Buy) and with a lower GGM-TP of RM3.60 (from RM4.45), following our profit cut. The new TP is based on 0.61x FY21 P/B (from 0.72x) with assumptions of 6.4% ROE (from 7.3%), 8.7% COE, and 3.0% LTG. This is below both its 5-year average of 0.95x and the sector’s 0.78x; we feel the valuation is fair given its ROE output is 2ppt beneath its historical and industry mean. We turn less bullish on CIMB as asset quality has waned extensively and there will be heavier provisioning ahead (denting profitability over the next 1-2 years). Also, we are uncomfortable that CIMB is the only bank so far zeroizing its regulatory reserves.

Source: Hong Leong Investment Bank Research - 27 May 2020