CIMB Niaga’s 3QFY20 CNP slumped 88% YoY and 83% QoQ mainly on higher loan provisioning as credit cost spiked to 3.5% (2QFY20: 2.7%; 3QFY19: 2%). Management now thinks FY20 credit cost could land at the upper end of the 2.5-2.8% guided range, which would keep credit cost elevated in 4QFY20. We maintain our earnings estimates pending the Group’s 3QFY20 results later this month. Maintain TP at RM3.45 and MARKET PERFORM call.

Weaker 3Q performance... CIMB Niaga (Niaga) reported 3QFY20 core net profit (CNP) of IDR120b (-88% YoY, ex-MSS cost in 3QFY19/-83% QoQ), which brought 9MFY20 net profit to IDR1.9t (-37% YoY, ex-MSS cost).

…as key line items deteriorated. As mentioned above, 3QFY20 YoY and QoQ CNP’s declines were mainly due to higher loan impairments, which jumped to IDR1.6t (+70% YoY/+26% QoQ) as Niaga continued to shore up loan loss reserves. 3QFY20 GIL ratio was slightly better at 5% (2QFY20: 5.2%; 3QFY19: 3.1%) with improved asset quality noted for consumer partly offset by higher corporate NPLs. Hence, impaired loan loss coverage rose to 125% vs 2QFY20: 118% and 3QFY19: 93%. Net interest income was down 3% QoQ and YoY due to a combination of estimated NIM squeeze of 17bps QoQ (-28bps YoY) and contraction in loan book (-3% QoQ/-6% YoY – on weaker SME, commercial and corporate segments). Liquidity continued to build up with total deposit and CASA growth at 4% QoQ/11% YoY and 3% QoQ/37% YoY, respectively. LDR fell to a low of 80%, which also impacted NIM. Opex was up 3% QoQ (-3% YoY, ex-MSS cost) due to non-personnel costs and with the weaker operating income, CIR ticked up to 51% from 48% in 2QFY20 and 3QFY19 (ex-MSS cost). Overall, 9MFY20 ROE stood at 6%, down from 10% in 9MFY19 (ex-MSS cost).

Briefing highlights. R&R loans made up 16% of total loans with corporate R&R at 10% of the corporate book while consumer and SME/commercial R&R made up 19-20% of their respective segments. Management thinks a portion of these loans will likely need further support but there was no guidance as to the proportion of R&R that could eventually turn NPL. Niaga intends to set aside some pre-emptive loan provisions for R&R that could potentially turn NPL. Thus, while Niaga maintain their credit cost guidance of 2.5-2.8%, management now thinks full-year credit cost is likely to be at the upper end of the range. Also, as compared to the 9MFY20 credit cost of 2.6% (annualised), this suggests that 4QFY20 credit cost is likely to remain elevated. Finally, as for the NIM slippage, Niaga believes that as loan growth rebounds (from consumer and SME), coupled with the continued traction from CASA, these should help lead to some NIM recovery ahead.

Forecasts maintained. We leave our forecasts for CIMB Group unchanged at this juncture. Recall that in a recent meeting with analysts, CIMB had guided for 3QFY20 group credit cost to stay elevated and sees potential upside risk to its credit cost guidance (2020: 120-140bps; 2020-21: 150-200bps) as the resurgence of the pandemic and resulting lockdowns in key markets may potentially affect the strength of the economic recovery ahead.

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 9.5x and 0.5x, respectively, we think valuations may be close to bottoming out. That said, we await further updates from management with respect to credit cost and its asset quality outlook – key focus areas, we believe, for investors.

Source: Kenanga Research - 9 Nov 2020