CIMB Thai’s 3Q20 core earnings fell 73% 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 and decade low foreign shareholding level, given short-term Covid-19 headwind uncertainties. Maintain HOLD and GGM-TP of RM3.30, based on 0.55x FY21 P/B.

Largely in-line. Excluding NPL sale gains in 3Q19, CIMB Thai (95%-owned) posted 3Q20 core earnings of THB82m (-73% QoQ, -77% YoY), which brought 9M20 sum to THB1.5b (+77% YoY). This was largely in line with our and consensus expectations, accounting for 83-85% 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.20%.

QoQ. Core profit decreased 73%, no thanks to higher loan loss provision (+22%) and negative Jaws (top-line contracted 1ppt faster than opex); net interest income shrank 11% as net loans fell 2% while net interest margin (NIM) was flat at 3.3%. However, non-interest income (NOII, +29%) provided some cushioning given stronger mark -tomarket (MTM, tripled), investment (+16%), and forex gains (+28%).

YoY. Similarly, the doubling of bad loan allowances, dragged core earnings down by 77%. Otherwise numbers would have been lifted by positive Jaws (opex dropped 11% due to strict cost controls).

YTD. Positive Jaws and lower effective tax rate (-12ppt) contributed to the 77% rise in core net profit. That said, higher impaired loan provision (+20%) eroded some gains.

Other key trends. Both net loans and deposits growth momentum slowed to 0% (2Q20: +3.7%) and 3.5% YoY (2Q20: +6.5%). In turn, sequential net loan-to-deposit ratio improved 4ppt QoQ to 113%. As for asset quality, gross NPL ratio climbed 10bp QoQ to 5.9%.

Outlook. We see CIMB Thai’s NIM to gradually stage a recovery in following quarters as Bank of Thailand appears 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 gloomy due to its large exposure to tourism and export sectors along with ongoing social unrest.

Forecast. Unchanged as CIMB Thai’s 3Q20 Results Were Largely Within Expectations.

Retain HOLD and GGM-TP of RM3.30, based on 0.55x FY21 P/B with assumptions of 5.9% ROE, 8.2% COE, and 3.0% LTG. This is beneath both its 5-year average of 0.92x and the sector’s 0.75x; 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 (P/B at -2SD and lower vs GFC’s level) and decade low foreign shareholding level, CIMB’s risk-reward profile is balanced, given short-term Covid-19 headwind uncertainties.

Source: Hong Leong Investment Bank Research - 22 Oct 2020