The 85% YoY drop in 4Q20 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 deteriorated but NIM stabilized. Overall, forecasts were unchanged. While trading at an attractive price point and 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.

Within estimates. CIMB Niaga (93%-owned) chalked in net profit of IDR148b (+23% QoQ, -85% YoY), bringing FY20 sum to IDR2,012b (-49%). This was within estimates, forming 100-105% of our and consensus full-year expectations.

QoQ. The 23% improvement in bottom-line was thanks to positive Jaws (total income expanded 3% vs opex decline of 1%) and lower effective tax rate (-12ppt). However, this was capped by the 9% rise in loan loss allowances. We note non-interest income (NOII) fell 6% primarily due to weak treasury (-38%) and card related income (-35%). That said, net interest margin (NIM) was relatively stable, nudging up 1bp.

YoY. Net profit fell 85% due to tepid top-line (-2%) and doubling in bad loan provision; NOII shrank 17% on the back of lower card businesses (-65%) and recoveries (-55%).

YTD. Core earnings (after stripping away one-off MSS cost in 3Q19) decreased 49%; this was again attributed to the 66% spike in impaired loan allowances and weak total income (-3%).

Other key trends. Loans growth declined at a faster clip of -10% YoY (3Q20: -5.6%) while deposits lost momentum by growing 6.1% YoY (3Q20: +11.3%). In turn, loan-to deposit ratio improved 1ppt sequentially to 84%. As for asset quality, gross impaired loans (GIL) ratio climbed 1ppt QoQ to 5.95%; this was due to deterioration at the SME and commercial segments.

Outlook. Considering the interest rate reduction in Nov-20 and Feb-21, NIM recovery will likely stall. Additionally, their plan to focus growing the consumer and SME lending portfolio may improve asset quality but cap NIM expansion; however, Niaga’s effort to raise CASA mix could alleviate NIM pressure. As for loans growth, it 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. Besides, loan restructuring efforts would help to limit a sag deterioration in NPL ratio. Notably, Otoritas Jasa Keuangan (a government agency that regulates and supervises the financial services sector) has prolonged the loan restructuring program until Mar-22 to support troubled borrowers.

Forecast. Unchanged as Niaga’s 4Q20 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.40%); CIMB Group will tentatively report its 4Q20 financials on 26 February.

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 0.86x; 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 -1.0SD) 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 - 22 Feb 2021