The 88% YoY drop in 3Q20 earnings was within estimates; this was due to weak total income and higher bad loan provision. Besides, loans growth declined at a faster clip and GIL ratio climbed slightly. Overall, forecasts were unchanged. In our view, CIMB’s risk-reward profile remains balanced despite its undemanding valuations (P/B at -2SD & lower vs GFC’s level) and decade low foreign shareholding level, given short-term Covid-19 headwind uncertainties. Retain HOLD and GGM-TP of RM3.30, based on 0.55x FY21 P/B.

Within our expectations. CIMB Niaga (93%-owned) registered 3Q20 core earnings of IDR120bn (-83% QoQ, -88% YoY, after stripping away one-off MSS cost in 3Q19), bringing 9M20 sum to IDR1,864bn (-37% YoY). This was within our estimates, making up 88% of full-year forecasts (we believe loan loss provision will stay elevated in 4Q20 due to impact from Covid-19 headwinds) but missed consensus, forming only 72%.

QoQ. The 83% fall in core bottom-line was due to weak total income (-3%) and higher loan loss allowances (+26%); non-interest income (NOII) declined 3% mainly because of lower forex and derivative gains (-54%). Also, net interest margin (NIM) contracted 37bp to 4.71%, no thanks to a larger skew towards investment securities, which have lower yield generation coupled with a smaller loans mix.

YoY. Similarly, core net profit dipped 88% due to tepid top-line (-9%) and surge in bad loan provision (+70%); NOII shrank 25% on the back of lower bancassurance (-79%), card businesses (-59%), and recoveries (-85%).

YTD. Core earnings fell 37%; this was again attributable to the 48% spike in impaired loan allowances and weak total income (-3%).

Other key trends. Loans growth declined at a faster clip of -5.6% YoY (2Q20: -2.3%) but deposits gained momentum by growing 11.3% YoY (2Q20: +3.0%). In turn, loanto-deposit ratio improved 6ppt QoQ to 85%. As for asset quality, gross impaired loans (GIL) ratio climbed 5bp QoQ to 4.98%; this was owing to the contraction in loans base at the corporate and commercial segments.

Outlook. We see the multiple interest rate cuts this year (4x so far, totalling to -100bp) to continue exert pressure on NIM. Also, their plan to focus growing the consumer and SME lending portfolio may improve asset quality but at the expense of NIM; however, Niaga’s effort to raise CASA composition could help to prevent a sharper NIM erosion. Besides, loans growth is expected to stay tepid, considering the confluence of events from Covid-19 headwinds. That said, pick-up in loan restructuring efforts would help to limit a significant sag in NPL ratio; furthermore, Otoritas Jasa Keuangan (government agency that regulates and supervises the financial services sector) extended the loan restructuring program until Mar-22 to support troubled borrowers.

Forecast. Unchanged as Niaga’s 3Q20 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.60%); CIMB Group will tentatively report its 3Q20 financials on 24 November.

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 0.74x; 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 - 9 Nov 2020