Management’s tone was cautious yesterday but maintained its FY21 guidance. Overall, we keep our forecasts as the underlying operational trends in 2Q21 are performing to expectations. In upcoming quarterly results, we will likely see NIM remaining steady, loans growing QoQ, tapering fee revenue and trading income, coupled with a less profound NCC. Although trading at an attractive price point and foreign shareholding level is near decade low, it is still a riskier investment proposition among large-sized banks. Maintain HOLD and GGM-TP of RM4.60, based on 0.77x FY22 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 2Q21. Overall, the tone was cautious but guidance for FY21 were intact: (i) 10-20bp NIM expansion, (ii) 80-90bp NCC, and (iii) 6-7% ROE.

Resilient top-line. Net interest income (NII) saw decent sequential growth, thanks to large QoQ loans drawdown (but at a softer YoY rate due to the high 2Q20 base effect) and NIM stayed steady across the board (M’sia, S’pore, Indo). However, non-interest income (NOII) was weaker QoQ as fee revenue tapered after an exceptionally strong showing in the wealth management business for the first 2 months of 2021. Also, we understand that trading income has moderated against 1Q21’s elevated level. In turn, the better QoQ NII was offset by the dull NOII. Nevertheless, overall top-line remained sturdy on a sequential basis.

Risk to NCC guidance? Even though management did not make any changes to its FY21 NCC guidance, Covid-19 headwinds may lead to an upward revision. That said, provision should not balloon in 2Q21, considering asset quality was stable and there is no repeating significant specific provision on client affected by the pandemic during the quarter. However, CIMB will relook at its macro-economic factor assumptions. For now, management feels that the RM1bn overlay made for potential bad loans in FY20 is largely adequate. Given the recent domestic lockdown, we note targeted repayment assistance for the consumer segment has climbed back up to high single digit % from 6% in May-21 (1Q21: 11%). On the group’s level, management continues to expect its moratorium and R&R take-up rate to be <20% even with the new deferment package (1Q21: 13%); alluded anything above could possibly drive NCC higher than guided.

Other findings. Despite rising oil prices, CIMB believes it is too premature to do any writebacks on the non-performing O&G bond, which was earlier restructured and then converted into a term loan. Also, CIMB claims that they are comfortable with the level of provisioning over here. As for its cost take-out initiative of RM300-500m for FY21- 22, management has identified some technology related item in M’sia for opex saving purposes and shed a bit of it during the quarter; we note in 1Q21, CIMB has started to extract RM275m p.a. savings from: (i) exiting its Thai commercial business (RM30m), (ii) restructuring S’pore operations and closed Orchard Road branch (RM45m), along with (iii) TNG deconsolidation (RM200m). Overall, the underlying QoQ opex trajectory has improved.

Forecast. Unchanged since there were no material updates from the briefing. Also, underlying operational trends in 2Q21 are performing according to expectations. CIMB aims to release its results on 27th August.

Retain HOLD and GGM-TP of RM4.60, based on 0.77x FY22 P/B with assumptions of 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 and industry average. Although trading at an attractive price point (P/B at -1.0SD) and foreign shareholding is close to 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 - 16 Jul 2021