3Q20 Preview: Another Subdued Quarter

• CIMB maintained its 2020 guidance, i.e. a 2.0-4.0% ROE and loan-loss charge of 120-140bps. Earnings risks are tilted to the downside, due to impact of the extended CMCO in Malaysia and unrest in Indonesia.
• We gather that it is still too early to estimate exactly the extent of defaults and R&R loans post-moratorium, though more clarity from management is expected by end-November 2020.
• Maintain SELL, with TP revised down to RM2.70. We cut 2021E-22E earnings by 4.7% and 6.2% as we raise our net credit cost expectations to 94bps and 70bps respectively, due to potentially higher asset quality risks.

Asset quality - consumer book stable; some corporate names being watched

The CIMB Group recently held a pre-results group meeting. Asset quality was the key issue discussed. On its consumer books, it remains relatively stable for Malaysia and the regional countries (even though borrowers who required loan moratorium were much less compared to Malaysia). On the non-retail segment, management is watching a few corporate names very closely, in particular those which were directly impacted by the COVID-19 pandemic. To recap, loans by business sectors which were directly impacted by COVID-19 accounted for 4.5% of group loans while indirectly impacted sectors account for 22.2% (as at June 2020). Bond holdings of impacted sectors (directly/ indirectly) account for 2.6% of total.

Potential top-up in credit cost in Malaysia and for regional legacy accounts

CIMB’s management is considering taking a conservative approach post-moratorium period in Malaysia (ended on 30 Sept) by taking into account additional overlays in credit cost (post-3Q20) as required under IFRS 9 (for the Malaysian loanbook), which is largely forward-looking in nature. Besides, management will also undertake the move to top-up provisions on some legacy accounts in Indonesia and Singapore in view of the challenging outlook. Given the extension of the Conditional Movement Control Order (CMCO) in Malaysia to 8 November (the CMCO was re-enforced on 14 October), management is also reassessing if there is a need to revise its provisioning outlook given a potential change in its economic base case.

Take-up of Moratorium Has Been Steady From 2Q20 to 3Q20

At its regional operations, the take-up rate for loan moratorium has been quite steady from 2Q20 to 3Q20, though Indonesia saw a slight increase. In Malaysia, as the automatic loan moratorium period had just ended, banks are now offering the Targeted Assistance Programme for borrowers who could not cope with repayments

Source: Affin Hwang Research - 30 Oct 2020