• Our full-year 2020E net profit of RM1,426m implies a 4Q20 net profit of RM446m for CIMB. We do not expect any major surprises based on guidance at a recent meeting where management maintained its net credit cost target of 140-150bps for 2020E
   
• On a more positive note, management expects the 2021E net credit cost to be lower at 60-80bps, while not expecting a similar level of credit losses for bonds
   
• Upgrade to HOLD (from Sell), with our TP unchanged at RM4.20 (based on a 0.7x P/BV target). We keep our forecasts unchanged pending more forward-looking guidance at the 4Q20 results briefing

4Q20 Likely to See Front-loading of Pre-emptive Provisions

Based on a meeting with CIMB’s management, it will not be a surprise to see another quarter with elevated provisions on a yoy basis, though it could be similar to that in 3Q20. This is due to additional overlays and macroeconomic variable (MEV) adjustments to cover for potential asset quality risk in Singapore, Indonesia and Thailand, while seeing some adjustments in overlay in Malaysia (due to higher risk posed by the B40 group and reversals as the moratorium came to an end in Sept20). At the same time, we also expect CIMB to take a hit on some loans that was directly impacted by COVID-19 in Indonesia (steel sector) and Singapore (OMV sector), albeit to a lesser extent in 4Q20 as management had made some provisions on these legacy accounts in 3Q20. Meanwhile, the unsecured segment (with respect to personal loans) in Malaysia and the Thai-auto sector loan books are also facing higher asset quality risks, which may result in a higher net credit cost (NCC) in 4Q20.

An Overall Lower Provisioning Level Expected in 2021

CIMB’s management does not expect a similar level of provisioning or NCC in 2021 given the strategy to further front-load these pre-emptive provisions in 4Q20 and thus keeping to its NCC guidance of 140-150bps in 2020E and 60-80bps in 2021E. Our assumptions are in line with management’s and as such, we make no changes to our forecasts for 2020E-22E as we also expect a GDP recovery in 2021E (+6% yoy) vis-à-vis a 5.5% fall in GDP in 2020E. Management is also not expecting a similar level of expected credit loss (ECL) for bonds in 2021 vis-à-vis 2020, though 4Q20 will still see a hit similar to that in 3Q20 (due to an O&G account). There will be sizeable provisioning on some derivatives exposure related to sectors impacted by COVID-19.

Source: Affin Hwang Research - 5 Feb 2021