CIMB’s 3Q20 Core Net Profit Fell 65% QoQ Due to Higher Loan Loss Provision, ECL for Bonds & Commitments, Along With Effective Tax Rate. Also, NIM Compressed Sequentially and Loans Growth Tapered. Overall, Results Missed Estimates Due to Higher-than-expected Provision for Bonds and Commitments. Thus, We Cut FY20 Profit Forecast by 27% But Kept FY21-22 Estimates. While Trading at An Attractive Price Point and Decade Low Foreign Shareholding Level, It Is a Riskier Investment Proposition, Given Less Resilient Asset Quality. Maintain HOLD But With a Higher GGM-TP of RM3.65 (from RM3.30), Based on 0.62x FY21 P/B.

Fell short of expectations. Excluding modification loss (in 2Q & 3Q20) and one-time transformational cost (in 3Q19), CIMB chalked in 3Q20 core net profit of RM204m (- 65% QoQ, -84% YoY), bringing 9M20 sum to RM1.3bn (-65% YoY). This fell short of estimates, forming 64-65% of both our and consensus full-year forecast; key deviation was from higher-than-expected provision for bonds and commitments.

Dividend. None Declared as CIMB Only Divvy in 2Q and 4Q.

QoQ. Core profit decreased 65%, no thanks to higher: (i) bad loan allowances (+3%), (ii) expected credit losses for bonds & commitments (+3-fold), along with (iii) effective tax rate. Also, net interest margin (NIM) contracted 4bp during the quarter. That said, it posted better non-interest income (NOII, +29%) from stronger forex gains and fees.

YoY. The spike in loan loss allowances (+4-fold), led to core bottom-line drop of 84%. Also, total revenue fell 4% due to weak NOII (-11%) as fees and investment-related income were poor. However, an opex decline of 21% mitigated a sharper fall.

YTD. Similar to the YoY showing, core earnings dipped 65% as provision for impaired loans jumped 4-fold. This was also caused by the 18% decline in NOII (due to softer fees and investment-related income) but was cushioned by the 10% opex contraction.

Other key trends. Both loans and deposits growth moderated to 1.6% (2Q20: +3.9%) and 6.6% YoY (2Q20: +8.4%) respectively. However, loan-to-deposit ratio (LDR) held steady at 89%. As for asset quality, gross impaired loans (GIL) ratio fell 23bp QoQ to 3.38% due to the effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near-term showing but should pick up pace 6-12 months down the road. Separately, we expect GIL ratio to stay at low levels in 1H21, since troubled borrowers can obtain targeted assistance from CIMB; however, it may mask actual damage and lead to a lag in NPL formation if the situation does not improve swiftly. As such, management is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. We cut FY20 profit forecast by 27% to factor higher expected credit losses for bonds & commitments. However, we left our FY21-22 estimates unchanged as our forecasts seem reasonable for now.

Retain HOLD call but with a higher GGM-TP of RM3.65 (from RM3.30), based on 0.62x FY21 P/B (from 0.55x) with assumptions of 5.9% ROE, 7.7% COE (from 8.2% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is below both its 5-year average of 0.91x and the sector’s 0.86x; we feel the valuation is fair given its ROE output is 2-3ppt beneath its historical and industry mean. While trading at an attractive price point (P/B at -1.5SD) and foreign shareholding level is at decade low, it is a riskier investment proposition, given less resilient asset quality.

Source: Hong Leong Investment Bank Research - 30 Nov 2020