CIMB Group’s 1Q20 core net profit came in at RM507.9m (-59% yoy, -52% qoq). Results were below expectations, accounting for 15% and 12.5% of our and consensus estimates; though a substantial provision of RM430m related to an O&G account was expected, there were more preemptive provisions set aside as well. Key takeaways from management’s discussion: i) net credit cost (NCC) guidance has been raised to 100-120bps for 2020 (resulting in our earnings cuts) while 2021 will stay elevated; ii) a NIM compression guidance of 10-15bps for 2020 (for a 100bps OPR cut); iii) 2020 loans may stay flat yoy; iv) ‘modification loss’ on the HP portfolio to be confirmed in 2Q20 (our preliminary estimate is about RM460m). Reiterate SELL, with our Price Target revised to RM2.80 based on 2021E target P/BV of 0.47x.

Results Below Expectations; Impaired Loan Provisions to Creep Up

CIMB posted weaker 1Q20 net profit of RM507.9m (-59% yoy; -52% qoq), as its net operating income of RM4.14bn (-0.6% yoy; -8.4% yoy) was further impacted by significantly higher provisioning (NCC spiking to 106bps from 34bps in 1Q19). The group saw a decline of 6.5% qoq in fund-based income (though +4.8% yoy) while non-interest income declined by 14% yoy and qoq (driven by lower trading and FX income). Subsequent to the rate hikes (50bps in Malaysia and Indonesia), 1Q20 NIM slipped to 2.44% from 2.53% in 4Q19 and 2.48% in 1Q19.

Main Concern on Asset Quality – More Diverse Portfolio Risks

CIMB’s GIL ratio deteriorated from 3.1% in 4Q19 to 3.4% in 1Q20, while ECL provisions were largely driven by the O&G sector default in Singapore, the Malaysian consumer portfolio and pre-emptive provisioning for CIMB Niaga (anticipating a pick-up in the moratorium and loan ‘rescheduling & restructuring’ requests). At this juncture, CIMB’s O&G exposure is 2.4% of its loanbook (LLC at 79%) and 2.4% of its bond holdings.

2020E/21E/22E Net Earnings Revisions of -14.5% / -9.5% / -2.9%

We cut our 2020E/21E/22E net profits by –14.5%/-9.5%/-2.9% as we raise our NCC assumptions from 75bps/55bps/55bps to 100bps/70bps/60bps.

Reiterate SELL, With Revised TP of RM2.80 (from RM2.60)

Maintain SELL with a revised Target Price of RM2.80, based on a target P/BV of 0.47x on 2021E BVPS, ROE of 6.6% and cost of equity of 10.4% as we rollover our valuation horizon to 2021E. Our 2020E-22E assumptions include loan growth at 0-3% and NIM at ~2.3%. Upside risks: ease in NCC.

Source: Affin Hwang Research - 27 May 2020