CIMB Thai’s 2Q20 core earnings fell 72% QoQ, largely within expectations. The poor results were owing to higher loan loss provision and negative Jaws. Also, loans growth lost momentum and NPL ratio has risen. Overall, no changes were made to forecasts. In our view, the stock’s risk-reward profile remains balanced despite its undemanding valuations (P/B at -2SD and lower vs GFC’s level) as group’s GIL ratio has drastically spiked and there will be heavier provisioning ahead. Besides, we are uncomfortable that CIMB is the only bank that zeroized its regulatory reserves. Maintain HOLD and GGM-TP of RM3.95, based on 0.66x FY21 P/B.

Largely in-line. Excluding NPL sale gains in 2Q19, CIMB Thai (95%-owned) posted 2Q20 core earnings of THB306m (-72% QoQ, +55% YoY), which brought 1H20 sum to THB1.4b (+3-fold YoY). This was largely in line with our and consensus estimates, making up 56-65% of full-year forecasts (we believe loan loss provision will remain elevated in subsequent quarters due to impact from Covid-19 headwinds); typically its contribution to overall group’s PBT is minimal at <10% but given the 2 fraudulent O&G accounts dragging Singapore’s performance, this has risen to c.30%.

QoQ. Core profit decreased 72%, no thanks to higher loan loss provision (+67%) and negative Jaws (top-line contracted 5ppt faster than opex); non-interest income (NOII) shrank 46% given weaker fees (-26%), mark-to-market (MTM, -85%) and investment gains (-53%). Also, net interest margin (NIM) contracted 2bp.

YoY. The 55% increase in core earnings came on the back of positive Jaws and lower effective tax rate (-22ppt). Otherwise numbers would have been hit by the 37% jump in bad loan allowances.

YTD. Positive Jaws, lower impaired loan provision (-7%), and falling effective tax rate (-21ppt) led core net profit to triple.

Other key trends. Both net loans and deposits growth momentum slowed to 3.7% (1Q20: +7.4%) and 6.5% YoY (1Q20: +13.4%) respectively. However, sequential net loan-to-deposit ratio rose 6ppt QoQ to 117%. As for asset quality, gross NPL ratio continues climbing by 50bp QoQ to 5.8%.

Outlook. We see CIMB Thai’s NIM to gradually stage a recovery in following quarters as Bank of Thailand seems inclined to pause its monetary easing cycle (instead preferring fiscal and credit measures to combat Covid-19 headwinds). However, their plan to switch to lower-yielding but safer assets will cap expansion. Separately, asset quality is set to deteriorate further given current economic woes; we understand the Thai economy is one of the gloomiest in South East Asia due to its large exposure to tourism and export sectors.

Forecast. Unchanged as CIMB Thai’s 2Q20 results were largely within expectations.

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 0.81x; 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 - 22 Jul 2020