The 33% YoY drop in 2Q20 earnings was largely within estimates; this was due to weak total income and higher bad loan provision. Besides, loans growth lost momentum and GIL ratio has risen. Overall, forecasts were unchanged. In our view, 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 extensively and there will be heavier provisioning ahead. Furthermore, 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 within expectations. CIMB Niaga (93%-owned) registered 2Q20 earnings of IDR689bn (-35% QoQ, -33% YoY), bringing 1H20 sum to IDR1,744bn (-12% YoY). This was largely in line with our and consensus estimates, making up 65 -67% of fullyear forecasts (we believe loan loss provision will remain elevated in subsequent quarters due to impact from Covid-19 headwinds).

QoQ. The 35% decline in bottom-line was due to weak total income (-3%) and higher loan loss allowances (+65%); non-interest income (NOII) fell 17% mainly because of lower fees (-19%), bancassurance (-77%), card businesses (-45%), and recoveries (- 56%). However, net interest margin (NIM) improved 6bp to 5.08% given a drop in cost of funds (better deposits mix, skewing towards CASA).

YoY. Similarly, net profit dipped 33% on the back of tepid top-line (-3%) and surge in bad loan provision (+58%); NIM saw a contraction of 45bp.

YTD. Despite positive Jaws (flat top-line vs opex fall of 3%), earnings decreased 12% as impaired loan allowances spiked 35%.

Other key trends. Both loans and deposits growth lost steam to -2.3% (1Q20: +3.3%) and 3.0% YoY (1Q20: +6.3%) respectively. As a result, loan-to-deposit ratio fell 5ppt sequentially to 91%. While for asset quality, gross impaired loans (GIL) ratio saw a deterioration of 83bp QoQ to 4.93%, primarily due to a bad account related to the coal sector; also, non-performing loans been creeping up across the board, save for SME.

Outlook. We see the multiple interest rate cuts this year (4x so far, totalling to -100bp) to continue exert pressure on NIM; however, management’s focus to grow CASA and optimize balance sheet could help to prevent a sharper NIM erosion. Also, seeing the confluence of events from Covid-19 headwinds, loans growth is anticipated to remain tepid; it may worsen in the event of a second partial lockdown as number of infections have increased since the gradual reopening of its economy. If this was to occur, asset quality is poise to weaken further. That said, pick-up in loan restructuring would help to limit a significant sag in NPL ratio.

Forecast. Unchanged as Niaga’s 2Q20 results were largely in line (usual contribution is c.20-25% to group’s PBT but because of the 2 fraudulent O&G accounts dragging Singapore’s performance, this has risen to c.45%); CIMB Group will tentatively report its 2Q20 financials 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 0.80x; 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 riskreward 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 - 3 Aug 2020