CIMB’s 2Q20 core net profit fell 55% YoY as loan loss provision jumped 5-fold. Besides, NIM compressed sequentially and asset quality waned. However, loans growth momentum held steady. Overall, results missed estimates due to higher than-expected loan loss provision; hence, we reduce FY20/21/22 profit forecast by 22%/7%/3%. Despite undemanding valuations, the stock’s risk-reward profile remains balanced as asset quality has waned extensively and there will still be heavy provisioning ahead. Reiterate HOLD but with a lower GGM-TP of RM3.50 (from RM3.95), based on 0.58x FY21 P/B.

Below estimates. Excluding modification loss and one-time disposal gains (both in 2Q19), CIMB chalked in 2Q20 core net profit of RM 579m (+14% QoQ, -55% YoY), bringing 1H20 sum to RM1.1bn (-56% YoY). This fell short of expectations, making up 39-42% of both our and consensus full-year estimates; key deviation was from higher than-expected loan loss provision.

Dividend. Surprisingly, none declared (vs 2Q19: 14sen) as management takes a wait and see approach, before divvying in 4Q.

QoQ. Core profit rose 14%, thanks to positive Jaws (total income rose 3% while opex fell 8%); this came on the back of better non-interest income (NOII, +11%) given forex gains and strict cost containment. However, net interest margin (NIM) contracted 9bp during the quarter. Also, the higher bad loan allowances (+52%) was a drag.

YoY. The spike in loan loss allowances (+5-fold), led to core bottom-line drop of 55%. Also, total revenue came in flattish due to weak NOII (-22%) as fees and investment related income were poor. However, an opex decrease of 7% mitigated a sharper fall.

YTD. Similar to the YoY showing, core earnings dipped 56% as provision for impaired loans jumped 4-fold. This was also caused by the 21% decline in NOII (due to softer fees and forex losses) but was cushioned by the 3% opex contraction.

Other key trends. Loans growth momentum held steady at 3.9% YoY (1Q20: +3.8%) while deposits gained traction to 8.4% YoY (1Q20: +4.5%). As result, loan-to-deposit ratio (LDR) fell 3ppt sequentially to 90%. For asset quality, gross impaired loans (GIL) ratio rose 18bp QoQ due to non-domestic accounts, mainly from the wholesale, retail, restaurants and hotels segment.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to taper as Covid- 19 related headwinds drag performance. Separately, we expect domestic GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from CIMB; however, this may mask actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again.

Forecast. We cut FY20/21/22 profit forecast by 22%/7%/3% to factor higher bad loan provision.

Reiterate HOLD but with a lower GGM-TP of RM3.50 (from RM3.95), following our profit cut and based on 0.58x FY21 P/B (from 0.66x) with assumptions of 6.0% ROE (from 6.4%), 8.2% COE, and 3.0%.This is beneath both its 5-year average of 0.93x and the sector’s 0.78x; we feel the valuation is fair given its ROE output is 3ppt 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 still be heavy provisioning ahead (denting profitability over the next 1-2 years).

Source: Hong Leong Investment Bank Research - 1 Sept 2020