Management sounded fairly optimistic yesterday and hence, we believe FY21 guidance will be kept largely intact in the upcoming results review. As such, our forecasts were unchanged. In 3Q21, we can expect steady NIM but weak trading income and higher NCC will drag overall showing. Since CIMB’s share price has performed strongly YTD, we think there are better risk-reward opportunities in underappreciated, laggard, lower beta banking stocks (which have comparable recovery growth drivers) like Maybank (TP: RM9.40). Retain HOLD and GGM-TP of RM5.10, based on 0.84x FY22 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 3Q21. We summarize the key takeaways in this report.

80-90bp NCC guidance should be largely intact. Loans outside of its Rescheduling and Restructuring (R&R) packages were generally stable and did not see any asset quality deterioration. Also, the group’s level R&R take up rate in 3Q21 stayed close to the preceding quarter’s 21%; the uptick in Malaysia’s retail (+3-4ppt) and commercial segments (+1-3ppt) were largely offset by the drop at its corporate and other regional portfolio. That said, there will be management overlay provision top-up in 3Q21 to account for more potential troubled borrowers, analysed from the Pakej Perlindungan Rakyat dan Pemulihan Ekonomi (PEMULIH) data. Besides, from the tone of it, FY21 net credit cost (NCC) of 80-90bp guidance should be largely intact, considering more granular provisions have been made and a bad legacy loan (relating to a local sugar company) may be recovered.

Mixed top-line outlook. Net interest margin (NIM) is expected to remain fairly steady in 3Q21 since CIMB avoided participating in the recent deposit competition. However, it is likely to be impacted by the interest waiver under the Financial Management and Resilience Program (URUS) in 4Q21; the B50 segment makes up close to 50% of its retail loan book. That said, management expects an interest rate hike in 2H22; a 25bp overnight policy rate (OPR) increase will help to lift net interest income up by RM80m and widen NIM by 2-3bp on an annualized basis. Separately, demand for loans has started to pick up momentum again. For non-interest income, we gathered its trading performance continues to be weak in 3Q21. Still, CIMB is expanding its bond book, albeit at a slower pace and this initiative will persist over the next 1-2 years.

Other findings. CIMB has identified another RM150m cost take-out in Malaysia and Indonesia but did not elaborate much on where it will come from; they only shared that their overall RM300-500m target for FY21-22 is on track. Also, management did not divulge more specifics on its goodwill write-off exercise but reaffirmed 2H21 would see some development on this matter.

Forecast. Unchanged since there were no material updates from the briefing. CIMB aims to release its results on 30th November.

Retain HOLD and GGM-TP of RM5.10, based on 0.84x FY22 P/B with assumptions of 8.4% ROE, 9.4% COE, and 3.0% LTG. This is below both its 5-year mean of 0.90x and the sector’s 0.92x; we feel the valuation is warranted given its ROE output is 1ppt beneath its historical and industry average. Since CIMB’s share price has performed strongly YTD, we prefer underappreciated, laggard, lower beta banking stocks (which have similar recovery growth drivers) like Maybank (TP: RM9.40) as it present better risk-reward opportunity.

Source: Hong Leong Investment Bank Research - 21 Oct 2021