We are of the view that CIMB Group’s 4Q19 earnings outlook will be on track to meet our full-year net profit forecast of RM4.8bn and it is unlikely there will be major negative surprises. After meeting with management, some of our key takeaways include: i) some chunky corporate loan drawdowns in Malaysia in 4Q19, which bumped up qoq growth (5-6% full-year guidance on-track); ii) stable 4Q19 NIM in Malaysia, which cushioned the slide in CIMB Niaga’s NIM qoq (overall, 5-10bps compression for 2019); iii) net credit cost at 40-50bps in 2019 (likely to come in below mid-point); and iv) the treasury and markets division had another good quarter, as bond yields continued going lower. For 2020, we foresee earnings upside (EPS growth at 2.1% yoy) to be capped by the rise in Forward 23 initiative overheads. Maintain HOLD and TP of RM5.65.

Group Loan Growth Expected to be Within CIMB’s Target of 5-6% Yoy

We understand that the CIMB Group managed to meet its group KPI on loan growth (at 5-6% yoy for 2019), thanks to some corporate loan drawdowns in Malaysia in December19. We believe that loan growth in other key countries such as Indonesia is picking up, with the focus on consumer and corporate loans (infrastructure and SOE-related) while being more risk-averse in the SME and commercial space. Meanwhile, for 2020, our loan growth target for CIMB remains unchanged at 4.2% yoy as we continue to stay cautious on regional economic growth due to risks related to geopolitical tensions, revival of trade wars, weakening in the Ringgit and funds outflows.

2019’s NIM Expected to See Compression of Circa 5-10bps

CIMB’s management maintained its expectation of a 5-10bps compression in 2019 NIM (vis-à-vis 2018’s 2.5%). As at 9M19, its NIM stood at 2.47%, indicating that 4Q19 NIM may potentially pull back on a qoq basis. We understand that this could be due to softer 4Q19 NIM at CIMB Niaga, largely due to the four rate cuts in Indonesia (July, August, September and October 2019), totalling a 100bps reduction in the BI rate in 2019 as well as due to deposit competition (CIMB Niaga’s LDR as at September19 stood at 99%). Niaga’s NIM is expected to see further compression in 2020, as a result of competition in the industry. In Malaysia, NIM are relatively stable on a qoq basis in 4Q19 as the system was flush with liquidity during the period (hence, competition for deposits was minimal).

Credit Cost Outlook Within Guidance of 40-50bps in 2019

For 9M19, CIMB had a net credit cost of 38bps while 3Q19 stood at 45bps. As the group is expected to end the year at circa 40-50bps (likely to be below mid-point of 45bps), this indicates a potential increase in 4Q19’s net credit cost, which is due to additional provisions on a couple of corporate accounts in Indonesia due to increased credit risks (though they have not been classified as impaired). Otherwise, we believe that the outlook for asset quality at CIMB Niaga remains sound (though management is cautious on the commercial/SME segment). Based on Sept19’s results, CIMB Niaga’s GIL ratio stood at 3.1% with the gross NPL ratio at 3.1%.

Manageable Capital Impact as CIMB Niaga Adopts IFRS 9 Standard

With the adoption of IFRS 9 for CIMB Niaga (effective 1 January 2020), there were no significant credit writebacks in the provision account. On the Day-1 of adoption, a capital deduction, which is equivalent to a 100-150bps will be reduced from the Tier-1 capital ratio of 19.96% (as at Sept19). Nonetheless, management believes that there are potential opportunities for model enhancement, which could lead to further release of capital.

CIMB in a Sweet Spot to Compete for the Digital-banking Licence

At this juncture, CIMB is giving feedback to Bank Negara Malaysia on the exposure draft of the Licensing Framework for Digital Banks. We believe that CIMB is likely to apply for a digital-banking licence, even though it could deliver the digital services required as a traditional branch-banking player. At present, CIMB’s Touch ‘n Go unit has a JV with Ant Financial Services Group to provide mobile wallet and related e-commerce financial services. Should CIMB Group apply for a digital-banking licence, it could potentially tap on the expertise of Ant Financial Services to further expand its services to the unserved and underserved groups in Malaysia.

Nonetheless, profitability and returns remain questionable for standalone digital banks due to the competitiveness in the services offered against similar players as well as the traditional branch-banking players (which also invest heavily into digital infrastructures).

Maintain HOLD, TP Unchanged at RM5.65 (0.96x 2020E P/BV)

We Maintain Our HOLD Rating With a 12-month Target Price of RM5.65, based on a 0.96x P/BV target on our 2020E BVPS (based on 2020E 8.8% ROE and 9.0% cost of equity). At this juncture, we note re-rating catalysts appear to be lacking in the near term. On a more positive note, asset quality for the group is expected to improve, with some prospects of a credit recovery at CIMB Niaga in 2020, on the back of improvement in commodity prices (in our view). Dividends are also likely to be higher, should the Group’s CET1 ratio rise above 13% (as at Sept19) (we estimate that every 100bps of capital ratio is equivalent to a DPS of 17 sen). The non-interest income contribution in 4Q19 is expected to be as good as in 3Q19, given meaningful investment gains from the treasury and markets division (with the 10-year MGS yield at 3.29% on 20 Jan20).

For now, our 2020-21E key assumptions include loan growth at 4.1-4.3% yoy, NIM at 2.45%, credit cost at 38-39bps and a CIR of 54-55%. At this juncture, we have yet to price in the impact of another potential rate cut in Malaysia.

Downside risks: further rate cuts, deterioration in asset quality, higher overheads. Upside risks: macro improvement and stronger loans growth.

Source: Affin Hwang Research - 20 Jan 2020