CIMB’s 1Q21 core profit jumped 6-fold QoQ, thanks to positive Jaws and lower loan loss provision. Also, NIM expanded sequentially, loans growth held steady, and GIL ratio improved. Overall, results beat expectations and hence, we raise FY21-23 profit by 5-6%. Although trading at an attractive price point and foreign shareholding is at decade low, in our opinion, CIMB is still a riskier investment proposition among large-sized bank. Maintain HOLD but with a higher GGM-TP of RM4.60 (from RM4.50), based on 0.77x FY22 P/B.

Beat expectations. Excluding net modification gains and deconsolidation of Touch ‘n Go Digital, CIMB posted 1Q21 core net profit of RM1.3bn (+6-fold QoQ, +3-fold YoY). This beat estimates, making up 34-37% of our and consensus full-year forecasts; key variance came from better-than-expected non-interest income (NOII).

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core profit jumped 6-fold, thanks to positive Jaws (total income grew 2ppt faster than opex), lower bad loan allowances (-48%), and ECL for bonds & commitments (- 95%). At the top, net interest margin (NIM) broadened 15bp but non-interest income (NOII) fell 7% on the back of forex losses.

YoY. Similarly, positive Jaws arising from quicker NOII expansion (+54% from strong investment-related gains and fee income), lower impaired loans provision (-26%), and ECL for bonds & commitments (-75%), led to the tripling of core bottom-line.

Other key trends. Both loans & deposits growth held steady at +0.7% (4Q20: -1.0%) and +3.5% YoY (4Q20: +2.5%) respectively. In turn, loan-to-deposit ratio was largely unchanged at 90%. As for asset quality, gross impaired loans (GIL) ratio ticked down 12bp QoQ due to mortgage, commercial property, and personal loan segments.

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and benign deposit competition in 2021. Separately, loans growth is anticipated to stay tepid for now as Covid-19 related headwinds drag near term showing but should gather more pace 6-12 months down the road. Besides, GIL ratio is likely to creep up but we are not overly worried as CIMB has made heavy pre emptive provisioning in FY20 and in our view, 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). Furthermore, we believe the Government & BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Since 1Q21 results beat estimates, we raise FY21-23 earnings by 5-6% to account for stronger NOII & reverse the 25bp OPR cut that we had earlier baked into our projections.

Maintain HOLD but with a higher GGM-TP of RM4.60 (from RM4.50), following our uplift in profit & roll valuations o FY22. The TP is based on 0.77x P/B with 7.9% ROE, 9.4% COE, and 3.0% LTG. This is below both its 5-year mean of 0.90x & the sector’s 0.88x; we feel the valuation is fair given its ROE output is 1ppt beneath its historical & industry average. While trading at an attractive price point (P/B at -1.0SD) and foreign shareholding 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 - 1 Jun 2021