CIMB Niaga’s 2QFY20 CNP slipped 33% YoY and 35% QoQ mainly following a spike in credit cost due to chunky loan provisioning for a corporate account and MEV adjustments. Nevertheless, management seemed relatively more optimistic following the reopening of the economy although credit cost is expected to stay elevated in 2H. We maintain our earnings estimates pending the Group’s 2QFY20 results later this month. Maintain TP at RM3.45 and UNDERPERFORM call.

Weaker 2Q performance ... CIMB Niaga (Niaga) reported 2QFY20 core net profit (CNP) of IDR0.7t (-33% YoY/-35% QoQ), which brought 1HFY20 net profit to IDR1.7t (-12% YoY).

… dragged by softer NoII and spike in loan allowances. 2QFY20 YoY and QoQ CNP’s drop was mainly due to higher loan impairments, which spiked to IDR1.3t (+58% YoY/+70% QoQ). The rise in loan provisioning was due to a combination of the deterioration in GIL ratio to 5.2% (1Q20: 4.4%; 2QY19: 3.2%) due to one corporate account in the coal sector and MEV adjustments. Non-Interest Income (NOII) also weakened sequentially (-18% QoQ/+3% YoY) due to weaker bancassurance and cards-related fee income, mitigated by healthy investment gains. Otherwise, loans base fell 2% YoY (-4% QoQ) with the weakness from SME and commercial banking but consumer banking was up 5% YoY (-2% QoQ) from mortgage and auto. NIM expanded by an estimated 15bps QoQ (-31bps YoY) due to lower funding cost as the weak loan growth allowed Niaga to release higher cost time deposits (-13% YoY/-2% QoQ) while CASA did well (+17% YoY/+2% QoQ). Impaired loan loss coverage was 118% (1Q20: 130%; 2QFY19: 90%) while 1HFY20 ROE stood at 9%, down from 11% in 1HFY19.

Briefing highlights. Management appeared more optimistic relative to the previous briefing. Firstly, the economy has reopened and activities have started to pick up. Management is seeing higher disbursements for mortgage and auto but said its SME and Commercial segments remain sluggish. Secondly, requests for loan restructuring have eased following the above developments and thus, Niaga now thinks restructuring cases would end up around 18-20% of loans vs. the earlier expectations of 15-25%. That said, credit cost guidance was raised to 2.5-2.8% vs 1.8-2.3% previously (2019: 1.7%). Niaga is reassessing loan collateral values and some management overlay may be added on to provisions. Also, although c.IDR400b in MEV adjustments have been taken up, another IDR200b will be required in 2HFY20. Management continues to guide for NIM of around 5% with lower funding cost to help cushion pressures on loan yields. Finally, Niaga has exhibited good cost discipline thus far, with approximately half of the cost savings due to structural cost initiatives while the balance relates to spending that has been deferred during the lockdown but will be incurred down the road.

Forecasts. We leave our forecasts for CIMB Group unchanged at this juncture. Recall that CIMB had recently guided for 2QFY20 annualised credit cost to exceed the 100-120bps full-year guidance due to provisioning for an oil trader and MEV adjustments. However, Niaga’s chunky provision for the corporate account has already been taken up at the group level previously. We forecast FY20 group CNP to slip by 48% YoY as loan allowances surge to RM4b from RM1.6b in 2019, in addition to weaker top-line arising from 15bps NIM compression (policy rate cuts) and softer NOII. Niaga contributed c.15% to Group pre-tax profit in 2019.

Maintain UNDERPERFORM and TP of RM3.45, which is based on a GGM-derived FY21E P/BV 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. 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 - 3 Aug 2020