• CIMB Niaga’s (Niaga) 2Q20 net profit declined 33% yoy and 34.7% qoq to IDR689bn (RM200m). Results were within our expectations.
• Key takeaways from the results:- i) NIM was steady qoq, though 1H20 declined by 36bps yoy to 5.05%; ii) loans declined by 2.3% yoy, as management remained cautious on asset quality; and iii) 2Q20 net credit cost (NCC) rose by another 150bps qoq to 301bps.
• Management’s outlook for 2020 remained unchanged, staying cautious on asset quality and holding back on loanbook expansion. We reiterate our SELL rating on CIMB Group and TP of RM3.00.

CIMB Niaga’s 2Q20 net profit declined 33% yoy and 34.7% qoq

As expected Niaga saw a contraction in 2Q20 earnings, as net profit declined 33% yoy and 34.7% qoq. 1H20 net profit declined 11.7% yoy to IDR1,744 (RM505.6m). Niaga reported flat 1H20 operating income of IDR8.3tn, as net interest income declined 1.8% yoy (due to rate cuts and contraction in loan growth) though mitigated by an expansion in non-interest income (+6.1% yoy; underpinned by FX, derivatives and securities gains). NIM, which declined by 36bps yoy to 5.05% in 1H20, is expected to remain at ~5.0% for 2020 (supported by robust CASA growth). Meanwhile, 2020 NCC is expected to stay elevated at 250-280bps, implying a further increase from 1H20’s NCC level of 226bps (+56bps yoy).

Niaga’s management guidance on outlook remains cautious

Niaga’s management remained cautious and reiterated that the outlook will be challenging in 2H20, due to headwinds from the COVID-19 pandemic. Management’s key priority is not to expand the loanbook (due to concerns on asset quality) but to continue providing financial assistance to consumers and business customers affected by the pandemic through the launch of R&R programs.

Reiterate SELL, with our Target Price unchanged at RM3.00

Maintain SELL with an unchanged TP of RM3.00, based on a 2021E target P/BV of 0.5x (2021E ROE at 6.6% and cost of equity at 10%). Our 2020E/21E assumptions include flat/1.0% loan growth, NIM at 2.3%/2.32% and NCC at 100bps/70bps. Our key concerns on the CIMB Group include the risk of heightened provisions above our forecast for 2021. Nonetheless, if management is able to front-load all provisions in 2020, the group will be on track for an upward trajectory in earnings growth in 2021. Upside risks: improvement in asset quality, rate hikes, and recovery in loan growth.

Source: Affin Hwang Research - 3 Aug 2020