• 2Q20 is likely to be weaker than 1Q20 due to higher expected credit losses (ECLs), and net credit cost could potentially rise >120bps (annualized).
• Depending on how much ECLs are front-loaded in 2020, we may continue to see an elevated NCC level in 2021.
• We reiterate our SELL rating with our TP unchanged at RM3.00 as we remain concerned on further downside risks on asset quality in 2021E, given the risk of a prolonged unemployment trend and business closures.

2Q20 likely to see a more severe hit in provisions, downside risks prevail

CIMB’s 2Q20 may potentially see expected credit losses (ECLs) or net credit cost (NCC) rising above an annualized 120bps. These are due to changes in macroeconomic factors (such as GDP, unemployment rate) which are also driving pre-emptive provisioning at the group, coupled with taking the full hit from an Oil&Gas trading company (c.RM500m). We understand that asset quality pressure (corporate and commercial loans) is rising in Indonesia, while loan restructuring and rescheduling (R&R) activities are picking up. Management also cautioned that in the worst-case scenario, 2020 NCC could deviate from its guidance of 100- 120bps to 150-200bps. This hypothetically implies a further 48%-97% downside risk from our 2020 net profit forecast, which assumes a 100bps NCC. Depending on how much ECLs are front-loaded in 2020, we may continue to see an elevated level of NCC in 2021 (our 2021E forecast: 70bps).

ROE guidance for 2020 to be revised to 3.0-5.0% and other key takeaways

Management mentioned that its initial ROE guidance for 2020 (9.0-9.5%) could potentially be revised down to 3.0-5.0% (in-line with our 2020E ROE forecast of 5.3%). Other key takeaways: i) NIM guidance at a 10-15bps compression yoy (2019: 2.46%). This includes impact from the modification loss and the recent rate cuts in Malaysia and Indonesia; ii) liquidity remains ample in all business jurisdictions and does not indicate a squeeze in funding; iii) management may consider toggling the dividend reinvestment scheme (DRS) up to 100%, in a move to create additional capital buffers; iv) capital ratios (CET1: 12.5%) are not expected to see a significant impact, though risk-weighted assets may rise further; and v) non-interest income appears stable on a sequential basis, though yoy will be lower due to market volatility.

Reiterate SELL, With Our Target Price Unchanged at RM3.00

Maintain SELL with an unchanged TP of RM3.00, based on 2021E target P/BV of 0.5x (2021E ROE at 6.6% and cost of equity at 10%). Our 2020E/21E assumptions include flat loan growth/+1.0%, NIM at 2.3%/2.32% and NCC at 100bps/70bps. Upside risks: improvement in asset quality, tax benefit from loan moratorium granted.

Source: Affin Hwang Research - 17 Jul 2020