• 3Q20 net profit of RM194.4m (-80.8% yoy; -30% qoq) was below our and consensus estimates. On a qoq basis, 3Q20 saw recovery in net interest income and stronger non-interest income while offset by marginal increase in provisions and a higher effective tax rate.
• CIMB guided that more provisions will be front-loaded in 2020, hence revising its 2020 NCC guidance to 140-150bps (from 120-140bps) while raising its expectation to 60-80bps for 2021 (from 50-60bps).
• We revised 2020E-22E earnings forecasts by -27%/+13%/+1.8%. Maintain SELL, with a revised PT of RM3.40. Investors should take the opportunity to lock-in gains given the recent rebound in share price.

9M20 operating results on a BAU basis down 4.2% yoy

On a ‘BAU” basis, CIMB’s 9M20 operating income declined by ~4.2% yoy, with 9M20 fund-based income relatively flat yoy (due to impact of the net ‘mod-loss’ of RM281m as well as the rate cuts) while non-interest income was 16.4% lower yoy (due to lower fee income and trading/FX gains). 3Q20 NIM recovered by 16bps qoq to 2.31% (given the lagged repricing of deposit cost and absence of the ‘mod-loss’) while 9M20 NIM declined 17bps yoy to 2.3%. Meanwhile, CIMB’s loanbook has remain subdued, +1.6% yoy, mostly underpinned by consumer (+3.5% yoy) while commercial and wholesale loans were mostly flat yoy, due to repayments and cutback in exposure (business banking). For 9M20, CIMB saw NCC at 144bps vs. 38bps in 9M19.

More provisions to be front-loaded in 2020, raising NCC guidance to 140-150bps

Based on previous guidance, CIMB’s management had additional overlays in credit cost (post-3Q20) for the Malaysian loanbook (a few corporate names as well as for some legacy accounts in Indonesia and Singapore). Hence, we revise our 2020E/21E/22E NCC assumptions as follows: 150bps/80bps/70bps (from 127bps/94bps/70bps), based on management’s revised guidance of 140-150bps for 2020 and 60-80bps for 2021. Accordingly, about 9.8% of Malaysia’s loanbook is under relief/assistance/R&R programs, while Indonesia, Singapore and Thailand at 16%, 6% and 27% respectively.

Maintain SELL, Price Target revised to RM3.40 (from RM2.90)

We maintain our SELL rating on CIMB, with a revised PT of RM3.40 (based on a 0.57x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 6.9% and cost of equity of 9.8% subsequent to our earnings revisions of -27%/+13%/+1.8% for 2020E-22E (with adjustments to net credit cost and improved NIM due to lower funding cost). Our key assumptions: NIM at 2.3%-2.33%; loan growth: flat/+1%/+3%; CIR at 51-54%. Upside risks: interest rate hikes; lower provisions.

Source: Affin Hwang Research - 30 Nov 2020