CIMB’s 4Q20 core profit fell 80% YoY due to higher loan loss provision and ECL for bonds & commitments. Also, loans contracted and GIL ratio increased. That said, NIM widened QoQ. Overall, results were largely within estimates. However, we raise FY21-22 earnings by 3-8% to reflect new set of guidance. 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 and with a higher GGM-TP of RM4.50 (from RM4.35), based on 0.77x FY21 P/B.

In line. Excluding modification loss & gain (in 3Q & 4Q20), CIMB reported 4Q20 core net profit of RM213m (+4% QoQ, -80% YoY), bringing FY20 sum to RM1.5bn (-68% YoY). This met estimates, forming 98-102% of our and consensus full-year forecasts.

Dividend. A final DPS of 4.81sen was proposed (vs 4Q19: 12sen; FY20: 4.81sen vs FY19: 26sen). Ex-date TBD later. This fell short of our and consensus expectations of 6.1sen and 7sen respectively.

QoQ. Core profit increased 4%, thanks to lower loan loss allowances (-9%), reversal of overprovision taxes and better total income (+5%); this came from a 6bp widening in net interest margin (NIM) and a 16% rise in non-interest income (NOII) as forex gain jumped 37% and fees rose 10%. That said, the 3-fold spike in ECL for bonds & commitments capped performance.

YoY. The jump in provision of bad loans (+2-fold) and ECL for bonds & commitments (+3-fold), led to core bottom-line dropping 80%. However, positive Jaws from quicker total income growth (+4%) vs opex (-7%) helped to mitigate some of the impact.

YTD. Similar to the YoY showing, core earnings dipped 68% as provision for impaired loans rose 3-fold while ECL for bonds & commitments increased 4-fold. This was also caused by the 9% decline in NOII but was cushioned by the 9% opex contraction.

Other key trends. Both loans and deposits growth moderated to -1% (3Q20: +1.6%) and +2.5% YoY (3Q20: +6.6%) respectively. As such, loan-to-deposit ratio nudged up 1ppt sequentially to 90%. For asset quality, gross impaired loans (GIL) ratio rose 18bp QoQ to 3.56% due to mortgage, commercial property, and personal loan segments.

Outlook. We see NIM pressure returning (but will be short-lived) given budding 25bp OPR cut in 1H21. On the other hand, loans growth is anticipated to stay tepid for now as Covid-19 related headwinds drag near-term showing but should gain back traction 6-12 months down the road. Even though GIL ratio has creeped upwards, we are not overly concerned as CIMB already made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Moreover, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Although 4Q20 results were largely in line, we lift FY21-22 profit by 3-8% to reflect new set of management guidance.

Maintain HOLD and with a higher GGM-TP of RM4.50 (from RM4.35), following the profit uplift and based on 0.77x FY21 P/B (from 0.73x) with assumptions of 6.2% ROE (from 5.9%), 7.2% COE, and 3.0% LTG. This is beneath both its 5-year average of 0.91x and the sector’s 0.90x; we feel the valuation is fair given its ROE output is 2ppt 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 - 8 Mar 2021