A briefing yesterday held no major surprises on asset quality trends while the targeted assistance take-up turned out to be lower than expected. That said, 3QFY20 credit cost is expected to stay elevated but more importantly, CIMB now sees potential upside risk to its credit cost guidance as the resurgence of the pandemic and resulting lockdowns in key markets may potentially affect the strength of the economic recovery ahead. No change to our earnings forecasts. MARKET PERFORM and RM3.45 TP maintained.

CIMB held a meeting with sell-side analysts yesterday. We set out below the salient points from the meeting. 3QFY20 asset quality stable … Like peers, asset quality was stable during the quarter. The domestic consumer and commercial banking/SME segments were still enjoying the loan moratorium while asset quality in other key markets was stable as well.

… while targeted assistance take-up was in line with peers … CIMB updated analysts that the take-up rate for the targeted assistance programme thus far was c. 10% of its Malaysia (MY) loan book, with retail at mid single-digit while commercial (and SME) and corporate banking were at low single-digit each. Meanwhile, R&R loans overseas were stable. Recall that as at end-2QFY20, the R&R mix for the key markets were; (i) Indonesia (ID): 18% (of ID book); (ii) Thailand (TH): 32%; and (iii) Singapore (SG): 6%. Collectively, we estimate R&R for MY and the above countries made up around 13% of group loans – lower than the earlier guided 20-30% range. Nevertheless, management expects requests for domestic R&R would continue to come in and the figure could tick up further.

… but expect loan provisions to stay elevated. While the asset quality and R&R trends were a positive, loan provisions, however, is expected to stay elevated in 3QFY20. Firstly, further overlays across the regions will need to be booked in, together with overlays relating to the targeted assistance programme. Secondly, CIMB will be making top-up provisions relating to several legacy accounts in ID and SG. Looking ahead, the resurgence of the pandemic and renewed lockdowns in MY and ID may impact the strength of the economic recovery and hence, CIMB now thinks there may be upside risk to its credit cost guidance (FY20/2-year credit cost guidance of 120- 140bps/150-200bps respectively). Any revisions, however, will only be shared during the 3QFY20 results’ briefing (tentatively on 24 November). We currently assumed FY20E/FY20E-21E credit cost of 140bps/240bps.

Decent income growth in 3QFY20. CIMB guided for sequential NIM recovery in 3QFY20 for MY (absence of modification losses and impact from the repricing of deposits) and SG. While management thinks an OPR cut next month is possible, the impact should be manageable. ID’s NIM, however, is expected to see some pressure due to the lagged effect from earlier policy rate cuts. For NoII, fee and trading incomes were healthy in Jul and Aug.

Others. Recall that CIMB had mentioned about writing off goodwill and intangibles during a recent meeting as part of its capital management efforts to lift ROE. Management clarified that this would take time as the process involves the auditors and hence, the write-off is unlikely to take place this year. Also, it is unlikely that the entire amount can be written off. Apart from the above, CIMB’s capital management efforts will also involve increasing dividend payout and/or discontinuing with the dividend reinvestment plan once capital is at healthy levels. There are no divestment plans at this moment, but a strategic partnership for its digital business is welcomed to share the opex burden (c. 2%-pts impact on CIR and 50bps to ROE).

Forecasts unchanged. Maintain MARKET PERFORM and TP of RM3.45, which is based on a GGM-derived FY21E PB of 0.6x. Currently trading at FY21E PER and PBV of 9.3x and 0.5x, respectively, we think valuations may be close to bottoming out. That said, the upside risk management see with respect to its credit cost guidance means that valuations may struggle to rerate until more clarity is available. Current FY20E dividend yield of 2% is also unlikely to be attractive enough to tide investors until then.

Source: Kenanga Research - 28 Oct 2020