CIMB held a management briefing recently. Provisioning is looking to tick up given higher risks from its Oil & Gas exposure as well as from retails especially in Indonesia. Overall loans growth is looking at single digit to flattish, dragged by Niaga. While 1QFY20 results may be slower but decent, 2QFY20 results will likely be challenging on higher provisioning. We slash our FY20E earnings by 7% to RM3.7b given this latest guidance and reduce TP to RM4.45. Maintain OUTPERFORM given its attractive dividend yield.

Asset quality. Asset quality was still holding up in 1QFY20. Upside risks in asset quality will be prevalent in the coming quarters with higher risks coming from Indonesia. CIMB expects higher volatility in Indonesia than others in the region with risks coming from both the mass affluent and corporate segments. Overall, provisioning is up for the consumer segment for both the Malaysian and Indonesian markets – specifically from both mortgages and HP. At present CIMB does not see significant uptick from Malaysian corporates.

Loan moratorium. Four sectors identified by CIMB as affected by COVID-19 are Hospitality, Aviation, Retail and Gaming constituting 5.4% of its loan book. There are also 12 sectors identified as having an indirect exposure and constituting ~16% of its loan book. Currently 10% of SME and Consumer loans have opted out of the Moratorium with 20% of Malaysian Corporates and Commercial loans opted in. Both Indonesia and Thailand corporates saw lower numbers opting in for the moratorium than Malaysia but it expects both will catch-up with Malaysia to opt in. Loans. The Group expects its loans growth for FY20 to hover from flattish to single digit. Loans likely to be dragged by underperforming Niaga as loans expected from flattish to negative. Malaysia loans will be underpinned by mortgages with expected clearer visibility after the MCO but Niaga’s mortgages are looking to be under pressure.

No significant impact on Interest Income as interest accrued. Cash forgone is unlikely to be significant as Liquidity Coverage Ratio is still >100%. Loss adjustments will be reversed out moving towards end of the loan tenure. The loss adjustments will have a higher impact on Fixed rates than Variables but will not be impactful as 85% of its loans are floating. Fee-based income looks to be under pressure with both QoQ and YoY performance heading south. Investment banking saw muted growth YoY with Fixed income mostly down given the selling pressure in bonds in March, curtailing MTM gains.

NIM compression looking to be higher than guided (5-10bps) due to the recent interest rate cut in March and expects another 50bps cut (in Malaysia with Indonesia and Thailand expected to have another 25bps cut) ahead. On hindsight, a 25bps cut will roughly translate to 3bps in NIM erosion (or RM150m-RM200m) but CIMB expects erosion will not be impactful given the surplus liquidity with competition for funding costs looking less likely.

Earnings revised. We revised down our earnings estimates given the latest guidance as above Our FY20E/21E earnings are slashed by 7%/4%, respectively, to RM3.7b/RM4.2b. Our latest assumptions; (i) Loans at +1%/+3% (from +4/6%), (ii) NIM compression maintained at 15bps for FY20 and flat for FY21, (iii) credit charge at 71bps/58bps (68/60bps previously), and (iv) NOII slashed by 7% for FY20. We also slashed our DPS by 2.0 sen to 20.0 sen (translating to payout of 52% (53% previously) as CIMB still holds to its 40%-60% payout target as its Dividend Reinvestment Scheme re-electable portion is likely to raise from its current 50%.

Our TP reduced to RM4.45 (from RM4.90) based on a FY20E target PBV of 0.75x (implying 1.5SD below mean) which is justified as our adjusted FY20E ROE of 6.5% is at an implied 1.5SD below mean. Given its attractive dividend yield of ~8%, we maintain OUTPERFORM.

Source: Kenanga Research - 29 Apr 2020