Management’s tone continues to be cautious yesterday but maintained its FY20 guidance. Overall, we kept our forecasts as the underlying operational trends in 4Q20 are performing to expectations; we can look forward to slight broadening in NIM, muted loans growth, and elevated NCC. Although trading at an attractive price point & foreign shareholding level is at decade low, CIMB is still a riskier investment proposition among large-sized banks, given less solid asset quality. Retain HOLD and GGM-TP of RM4.35, based on 0.73x FY21 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 4Q20. Overall, the tone remains cautious given worsen ing domestic Covid-19 situation. That said, there were no changes to FY20 guidance: (i) 10-15bp NIM slippage, (ii) 140-150 net credit cost, and (iii) flattish loans growth.

Slight improvement in NIM. In Malaysia and Indonesia, 4Q20 NIM was stable while Singapore and Thailand saw expansion. In Singapore, it benefitted from lower cost of funds, on the back of fixed deposit optimization. As for Thailand, the absence of some accounting adjustment in 3Q20 helped to lift NIM. Overall, sequential 4Q20 NIM was guided to improve slightly.

Muted loans growth. We gathered overseas’ lending activities remained weak (out standing loans showing decline of 1-6% YoY) but Malaysia was still able to churn out growth despite chunky corporate repayment in 4Q20; this was thanks to the resilient consumer segment, primarily from mortgage and auto financing. On a net basis, YoY growth for the group is seen to be flat.

Softer trading income. Management shared that 4Q20 trading income has softened QoQ. This was due to an exceptionally high income base formed in 3Q20. Moreover, it is seasonally frail because of holiday-taking behaviour.

High NCC. CIMB indicated loan loss provision in 4Q20 was still elevated, owing to: (i) additional forward-looking overlays, (ii) Indonesia and Singapore topping up bad loan allowances for some legacy accounts, along with (iii) pressure from local unsecured loans and auto financing at Thailand. Similarly, expected credit losses for bonds and derivatives were also guided to be abnormally high (comparable to 3Q20), no thanks to a specific O&G account and sectors impacted by Covid-19; however, these items are expected to taper significantly in FY21.

Other findings. Domestic rescheduled and restructured (R&R) loans and those under the targeted assistance program are now at low-teens percentage of total lending (vs 9.8% in 3Q20). Outside of Malaysia, the R&R take-up rate was relatively stable. At the group’s level, it is also at low-teens percentage (guidance: <20%). Besides, CIMB has the intention to divvy in upcoming results release with a FY20 payout ratio of 40-60% but it would still largely subject to board of directors and BNM’s approval.

Forecast. Unchanged since there were no material updates from the briefing. Also, underlying operational trends in 4Q20 are performing according to expectations. CIMB Niaga aims to release its results on 19 Feb while the group is reporting on 26 Feb.

Retain HOLD and GGM-TP of RM4.35, based on 0.73x FY21 P/B with assumptions of 5.9% ROE, 6.9% COE, and 3.0% LTG. This is beneath both its 5-year average of 0.91x and the sector’s 0.85x; 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 -1.5SD) and foreign shareholding level is at decade low, it is still a riskier investment proposition among large-sized banks, given less resilient asset quality.

Source: Hong Leong Investment Bank Research - 27 Jan 2021