2QFY20 results missed expectations on weaker-than-expected NoII and higher FY20E credit cost guidance of 120-140bps (from 100-120bps). We cut FY20E CNP by 31% but FY21E CNP is unchanged for now, as we opt to keep a more prudent stance on credit cost (FY21E: 100bps). In our view, asset quality risk for CIMB is higher relative to peers, necessitating higher loan allowances while keeping capital levels lower than peers. That said, valuations now appear fair and thus, we lift our call to MARKET PERFORM from UNDERPERFORM with unchanged RM3.45 TP.

2QFY20 PATMI slipped further to RM277m (-78% YoY, ex-gains from disposal in 2QFY19/-45% QoQ). 1HFY20 net profit of RM785m (-68% YoY, ex-disposal gains), makes up just 31%/28% of our/consensus FY20E PATMI. Key variances were: (i) weaker-than-expected NoII as fee income was soft while trading and investment gains were not as robust as peers; and (ii) an upward revision in credit cost guidance to 120-140bps from 100- 120bps (previous FY20E: 109bps) due to macro-economic factor adjustments, Covid-19-related provisions and potential weakness from vulnerable sectors. As expected, there was no interim dividend.

Other highlights. Excluding modification losses of RM281m, 2QFY20 pre tax profit was down 33% QoQ (-72% YoY) mainly due to the 52% QoQ (+347% YoY) rise in loan impairments (credit cost at 160bps vs 1QFY20/2QFY19: 106bps/37bps). There was another chunky provision for an O&G account of RM500m (1QFY20: RM450m), coupled with RM470m macro-economic factor (MEF) and Covid-19-related provisions. Also, unlike peers, GIL deteriorated – up 7% QoQ/20% YoY with the deterioration from Indonesia and Singapore (manufacturing and wholesale/retail trade/restaurants sectors). That said, with the heavy provisions taken thus far, LLC improved to 82% from 76% in 1QFY20 (2QFY19: 78%). Apart from the above, NIM (ex-modification losses) slipped by an estimated 12bps QoQ, opex was well controlled (-8% QoQ/-7% YoY) but could rise ahead while NoII rose 11% QoQ (-22% YoY, ex-disposal gains) on higher treasury contribution. Loans expanded 4% YoY (+2% QoQ), deposit growth was 8% YoY (+5% QoQ), underpinned by CASA (+11% QoQ/+20% YoY). CET-1 ratio was 12.9% while 1HFY20 reported ROE of 2.8%.

Key takeaways from conference call: Domestic loan demand has improved, as economic activities picked up but group loan growth is expected to end FY20 in single-digit as loan base in Indonesia is expected to contract (commercial and corporate segments). CIMB has reached out to 330k customers in the vulnerable segment so far. 42k have indicated interest for further support, of which, 83% have been approved for R&R and the rest declining to restructure. Value-wise, this is 3% of the domestic consumer book and 2% of domestic loans. Management tentatively expects 20-30% of group loans that may need R&R. While credit cost has been revised up, CIMB kept its cumulative 150-200bps credit cost guidance over 2020-21 (we think this may be too optimistic). Although no chunky provisions seem apparent currently, this cannot be ruled out. Also, NIM squeeze is still guided for 10-15bps (mainly due to Malaysia and Indonesia), and excludes further OPR cuts (3bps sensitivity to 25bps OPR change) while the target for opex is for a reduction of 5% YoY. CIMB is comfortable that it would be able to meet its CET-1 target of 12-13%. Finally, due to the revision in credit cost, ROE guidance is revised to 2-4% from 3-4% during a recent meeting.

FY20E net profit cut by 31%, mainly as we raised our FY20E credit cost to 140bps from 109bps. While this implies a two-year cumulative credit cost of 240bps, we opt to remain more prudent for now given the lack of visibility on asset quality. All-in, FY20E ROE is revised to 3% (from 4.3%). FY20E DPS is cut to 6.8 sen from 12.0 sen due to the earnings revision and revised 40% pay-out ratio (from 50%).

TP maintained at RM3.45, based on a GGM-derived FY21E PBV of 0.6x. Relative to peers, we think CIMB has less headroom ahead to shield earnings and capital from higher loan allowances, e.g. effective tax rate should normalise in 2H, absence of regulatory reserves while investment revaluation reserve stood at a loss of RM227m. That said, following the recent correction in share prices, valuations now appear fair and hence, we upgrade our recommendation to MARKET PERFORM from UNDERPERFORM.

Key risks to our call are: (i) higher-than-expected margin, (ii) stronger-than-expected loans growth, (iii) lower-than-expected rise in credit charge, and (iv) pickup in capital market activities.

Source: Kenanga Research - 1 Sept 2020