Management’s tone was guarded last Friday and maintained its FY21 guidance. Overall, we keep our forecasts as the underlying operational trends in 1Q21 are performing to expectations. In upcoming quarterly results, we will likely see NIM widening, muted loans growth, better trading income & 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 bank. Reiterate HOLD and GGM-TP of RM4.50, based on 0.77x FY21 P/B.

On Friday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 1Q21. Overall, the tone was guarded but guidance for FY21 on NIM (0-10bp improvement) and net credit cost (80-90bp) were unchanged.

NIM continues to expand. This was more prominently seen in Malaysia, Indonesia, and Singapore as cost of funds tapered, on the back of balance sheet optimization, coming from reduction in FD and built up in CASA. Also, there was a small yield pick - up in Malaysia and Indonesia, without any solid underlying reasons and hence, is not expected to last. Overall, sequential 1Q21 NIM was guided to widen.

Muted loans growth. We gathered lending activities in Malaysia held up well, thanks to its consumer segment but overseas remained tepid. In Indonesia, loans growth was still slow, while in Thailand, it was dragged down by its commercial unit as they are in midst of exiting this space, coupled with sluggish credit appetite at both its consumer and corporate businesses. On a net basis, loans growth is seen to be muted.

Better trading income. Despite the volatile fixed income market, CIMB shared in the months of January and February, trading performance was solid but March was weak. However, the general QoQ showing in 1Q21 was better.

Risk to NCC guidance. Although management did not make any changes to its FY21 NCC guidance, the escalating Covid-19 cases in Thailand and Malaysia may lead to an upward revision. Furthermore, the slow vaccination rollout creates another layer of uncertainty. On a separate note, 1Q21 delinquencies for unsecured loans in Indonesia has increased but it was within CIMB’s expectations. Besides, the non-retail portfolio in Malaysia saw some deterioration. That said, the RM1.5b pre-emptive provisioning made in FY20 is seen to be largely adequate for now.

Other findings. The Group’s R&R as a % of total lending in 1Q21 has trended lower (from 15% in 4Q20) due to ending assistance programs for the consumer segment in Indonesia and Thailand. Also, the take-up rate in Singapore has decreased. However, Malaysia saw a slight uptick at its corporate and commercial units but consumer was stable. Like FY20, we believe the cost take-out of RM300-500m for FY21-22 will come primarily from natural job attrition, hiring freeze, lower capex spending and marketing expenses. Moreover, there could be potential for goodwill write-off this and next year but it would not be overly significant causing CIMB to swing into the red.

Forecast. Unchanged since there were no material updates from the briefing. Also, underlying operational trends in 1Q21 are performing according to expectations. CIMB Niaga aims to release its results on 29 April while the Group is reporting on 31 May.

Retain HOLD and GGM-TP of RM4.50, based on 0.77x FY21 P/B with assumptions of 6.2% ROE, 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 1ppt 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, considering its less resilient asset quality.

Source: Hong Leong Investment Bank Research - 26 Apr 2021