CIMB’s 2Q21 core profit doubled YoY on the back of positive Jaws from quicker total income growth and lower loan loss provision. Also, NIM widened QoQ and GIL ratio remained flat. However, loans growth was weak. Overall, results beat expectations and thus, we raise FY21-23 profit by 6-8%. In our view, CIMB is still a riskier pick among large-sized bank and there are no compelling catalysts to re-rate the stock. Keep HOLD but with higher GGM-TP of RM5.10 (from RM4.60), based on 0.84x FY22 P/B.

Beat expectations. CIMB registered 2Q21 net profit of RM1.3bn (-4% QoQ, doubled YoY on a core basis, after removing net modification gains/losses, deconsolidation of Touch ‘n Go Digital, and intangible asset write-offs, across all quarters under review), bringing 1H21 sum to RM2.6bn (doubled YoY). This beat estimates, forming 64-69% of our & consensus full-year forecasts; key variance was softer-than-expected opex.

Dividend. 1st interim DPS of 10.44sen was proposed (2Q20: nil). Ex-date TBD later.

QoQ. Core earnings decreased 4%, no thanks to weaker top-line (-2%) due to lower non-interest income (NOII, -18%, dragged by poor fee and investment performance) coupled with higher effective tax rate. That said, the widening in net interest margin (NIM, +4bp), lower opex (-6%), and loan loss provision (-9%) helped to cushion some of the damage.

YoY. Positive Jaws arising from quicker total income growth vs opex (+6ppt) together with lower impaired loan allowances (-56%), led to the doubling in core bottom-line.

YTD. Similarly, the increase in core profit (doubled) was driven by positive Jaws (total income rose 13% while opex grew only 2%) and lower provision for bad loans (-44%).

Other key trends. Loans and deposits growth continued to be weak at -0.2% (1Q21: +0.7%) and +0.2% YoY (1Q21: +3.5%) respectively. In turn, loan-to-deposit ratio was sequentially down slightly to 89% (-1ppt). For asset quality, gross impaired loans (GIL) ratio stayed flat QoQ at 3.44%.

Outlook. We expect NIM to come under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion. Also, loans growth is anticipated to stay lacklustre for now as Covid-19 related headwinds drag near-term performance. Besides, GIL ratio is likely to creep up but we are not overly concerned as CIMB has made heavy pre-emptive provisioning in FY20 and in our opinion, credit risk has been adequately priced in by the market, looking at the elevated 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 & BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Since 2Q21 results beat expectations, we raise FY21-23 earnings by 6-8% to account for softer opex.

Keep HOLD but with higher GGM-TP of RM5.10 (from RM4.60), following our uplift in earnings. The TP is based on 0.84x FY22 P/B (from 0.77x) with the assumptions of 8.4% ROE (from 7.9%), 9.4% COE, and 3% 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. Overall, we still feel that CIMB is a ris kier investment proposition among large-sized banks, given its less resilient asset quality. Also, there are no compelling catalysts to re-rate the stock.

Source: Hong Leong Investment Bank Research - 1 Sept 2021