• 2Q20 net profit of RM277m (-81.6% yoy; -45.4% qoq) was below our and consensus estimates, with 1H20 net profit (RM785m, -70% yoy) accounting for 27% of our estimate (prior to revisions). 1H20 BAU net profit (ex-net ‘mod loss’ impact of RM281m) stood at RM998.6m (-63% yoy).
• The quarters ahead remain muted, with potential downside risks from: i) continual proactive provisions; and ii) further rate cuts (25bps to 50bps).
• Revising our 2020/21/22E earnings by -33.6%/-2.4%/+14.1%. Reaffirm SELL with revised TP of RM2.90. There was no 2Q20 interim dividend (2Q19: 14 sen).

1H20 operating income (BAU basis) down 4% yoy, excluding impact of ‘modloss’

On a ‘BAU” basis, CIMB’s 1H20 operating income declined by 4% yoy, with fund-based income up 6% yoy (excluding a net ‘modification-loss’ of RM281m in Malaysia and Thailand) while non-interest income was down 19.7% yoy. Other key takeaways: i) 2Q20 NIM slipped 29bps qoq and 22bps yoy to 2.15% while 1H20 NIM stood at 2.29% (-17bps yoy). Excluding the net ‘mod-loss’ impact, 1H20 NIM would have been at 2.39% (-7bps yoy); ii) loans were flat ytd; iii) 2Q20 annualized net credit cost (NCC) spiked up to 159bps vs. 106bps in 1Q20 and 37bps in 2Q19, while 1H20 NCC was at 132bps (attributable to regional impairments, macro provisions and management overlays).

Total Credit Cost of 150-200bps to be Recognized Over 2020-21

Earnings outlook in 2H20 may be muted due to: i) continual proactive provisions for borrowers in the vulnerable sectors, upon the expiry of the loan moratorium period (Sept20). Altogether, management expects total credit cost of 150-200bps over 2020- 21 as may be required for potential increase in loans under R&R (estimated to rise further, accounting for 20-30% of outstanding loans) and further lumpy impairments; ii) any further rate cuts. CIMB’s NIM may see a 2-3bps compression for every 25bps rate cut (net profit impact at ~RM95m). Given current circumstances, management expects a subdued 4-6% ROE and a 120-140bps NCC for 2020

Reaffirm SELL, Target Price Lowered to RM2.90 (from RM3.00)

We reaffirm our SELL rating on CIMB, with a lower 12-month TP of RM2.90 (based on a 0.49x P/BV on our 2021E BVPS) underpinned by a 2021E ROE at 6.4% and cost of equity of 9.9%. We revise our 2020E/21E/22E earnings by -33.6%/-2.4%/+14.1%, as we stepped up our NCC assumptions for 2020-21E to 127bps and 88bps, respectively, from 100bps and 70bps. Meanwhile, we have lowered overall funding cost for CIMB for 2020-22E due to the impact from the rate cuts, resulting in a positive impact of 14% to our 2022E earnings. Upside risks: interest rate hikes and lower provisions.

Source: Affin Hwang Research - 1 Sept 2020