Again, management sounded cautious during yesterday’s briefing but kept its FY20 guidance. Forecasts were unchanged as the underlying operational trends in 2Q20 are performing to expectations. For now, the stock’s risk-reward profile remains balanced despite its undemanding valuations (P/B at -2SD & lower vs GFC’s level) as asset quality has waned considerably and there will be heavier provisioning ahead. Besides, we are uncomfortable that CIMB is the only bank that zeroized its regulatory re serves. Keep HOLD and GGM-TP of RM3.95, based on 0.66x FY21 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 2Q20. Overall, management still sounded cautious but kept its FY20 guidance: (i) 10-15bp NIM contraction, (ii) 100-120bp net credit cost, and (iii) 3.0-5.0% ROE. However, they warned that their NIM and NCC targets may have to be revised if OPR is reduced further and asset quality worsens.

Weaker NIM. In Malaysia, we gathered 2Q20 NIM will be hit by the string of OPR cuts and MFRS 9-related day 1 modification loss. Also, Singapore was negatively affected by the downward SIBOR movement. As for Indonesia, balance sheet optimisation had led to NIM improvement and is seen to provide some cushioning effect. Overall, 2Q20 NIM slippage will come in slightly higher than its 10-15bp contraction guidance.

Lacklustre NOII. Management shared trading income was decent in 2Q20. However, like other banks, we believe fee income from commercial and investment banking was sluggish. Overall, CIMB hinted that non-interest income (NOII) is weaker YoY.

Higher NCC. Management indicated that annualized net credit cost (NCC) in 2Q20 is poised to be higher than its full year guidance of 100-120bp. This comes mainly from: (i) macroeconomic factors adjustment and (ii) provision of c.RM500m due to another fraudulent O&G account in Singapore (already highlighted previously). Besides, there is asset quality pressure at Indonesia’s business segment but consumer has been improving. Separately, Malaysia is still stable.

Other findings. We gathered there were more rescheduling and restructuring (R&R) efforts observed in Indonesia and Malaysia while Thailand and Singapore were stable. Besides, CIMB plans to bring down its FY20 overheads by 3-5% (particularly from its personnel, admin and general expenses). Also, CASA growth is expected to moderate in 2H20 as economic activities pick up pace. Lastly, CIMB looks to maintain its payout ratio at 40-50% and toggle back up the electable portion of its dividend reinvestment scheme to 100% (this is in order to conserve cash and capital).

Forecast. Unchanged since there were no material updates from the briefing. Also, underlying operational trends in 2Q20 are performing according to expectations. CIMB Thai and Niaga are targeting to release their results on 21 and 30 July, respectively, while the Group is reporting tentatively on 26 August.

Retain HOLD and GGM-TP of RM3.95, based on 0.66x FY21 P/B with assumptions of 6.4% ROE, 8.2% COE, and 3.0%. This is beneath both its 5-year average of 0.94x and the sector’s 0.82x; we feel the valuation is fair given its ROE output is 2ppt below its historical and industry mean. While trading at an attractive price point, CIMB’s risk reward profile remains balanced 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 that zeroized its regulatory reserves

Source: Hong Leong Investment Bank Research - 17 Jul 2020