A briefing yesterday suggested that 2QFY20 earnings would be weaker sequentially, driven by further NIM compression and higher loan allowances. While expected, we found the lack of sequential pickup in NoII slightly disappointing, prompting us to lower FY20F/FY21F net profit by 11%/5%. We maintain our TP of RM3.45 and UNDERPERFORM call. Relative to peers, we see higher asset quality risks for CIMB while capital ratios look lighter.

CIMB held a meeting with sell-side analysts yesterday. We set out below the salient points from the meeting.

Asset quality outlook still lacks visibility with GIL only expected to peak in 2021 (no guidance on peak GIL levels). For now, CIMB has been in active engagements with borrowers across the region, especially the corporate and SME segments. By country, restructured and rescheduled (R&R) activities picked up in Indonesia (ID) in 2Q. While this will lead to an uptick in CIMB Niaga (Niaga)’s GIL and loan impairments when it reports its 2Q results, management said that the higher provisions had already been taken up at group level earlier. CIMB’s exposure to the aviation industry stands at 2.1% (including business services), but direct exposure to airlines was just 0.4%.

Higher loan impairments sequentially, which will include a chunky provision for an O&G corporate in Singapore (as mentioned earlier) plus provisioning for adjustments in macro economic variables across the region. Thus, 2Q annualised credit cost will run ahead of the guided 100-120bps but on a full-year basis, CIMB is leaving the guidance unchanged. CIMB has now also guided for cumulative credit cost (for 2020-2021) to range between 150bps and 200bps, with the broad range due to the lack of visibility. Our forecast is slightly higher at 208bps (2020F: 109bps; 2021F: 99bps).

Expect sequential softening in income. 2Q will likely see NIM compression exceeding the 10-15bps guidance, due to the impact from OPR cuts and Day One modification losses (no guidance). That said, on a full-year basis, NIM squeeze should be closer to the 15bps mark, assuming no further OPR cuts. We have assumed 15bps compression in our forecast. As for non-interest income (NoII), CIMB shared that 2Q levels were largely similar to that in 1Q20 (-22% YoY). This suggests downside risk to our forecast, where we assumed a 5% YoY drop in 2020F NoII.

Capital looks comfortable. CIMB seems confident of keeping its CET- 1 ratio around the 12% level. It is considering its options on dividends, which include either shifting the entire payout to 4Q (where visibility on outlook may improve) or paying interim dividends in 2Q but with the DRP option.

Others. Liquidity appears manageable due to the loan moratorium, weak loan growth and drop in consumer spending. CASA levels post 1QFY20 have been sustained, but are expected to taper off after Sep. CIMB’s new GCEO is relooking at Forward23 with some possible tweaks within the pivots and financial targets. Overall CIMB guided 2020 ROE of 3-5% (vs. our previous FY20 estimate of 4.9%).

FY20E/FY21E profit forecasts lowered by 11%/5%, respectively, due solely to downward revisions to NoII (markets-related income). Our revised FY20E/FY21E ROE stands at 4.3%/5.7%, respectively. We have also reduced our FY20E/FY21E DPS forecasts to 12.0 sen (-11%) and 16.0 sen (-3%), based on payout of c. 50%. Revised dividend yields are decent at 3.3-4.4%.

Maintain UNDERPERFORM and TP of RM3.45, which is based on a GGM-derived FY21E PB of 0.6x. While we believe investors may look beyond the upcoming results and focus on the path to recovery, the uncertainties surrounding asset quality prompts us to retain our call as we think asset quality risks are relatively higher for CIMB, especially its ID book. In addition, CIMB lacks headroom to support earnings and capital, e.g. zero regulatory reserves and revaluation losses on financial assets, coupled with weaker capital position vis-à-vis large cap peers

Source: Kenanga Research - 17 Jul 2020