3QFY20 results missed expectations on asset quality weakness with respect to bond portfolio, coupled with a high tax rate. These masks sequential improvement in operating income and tight cost management. Meanwhile, 3QFY20 credit cost remained stubbornly elevated due to pre-emptive and top- up provisions. We cut FY20E CNP by 11% but FY21E CNP is relatively unchanged. Although we think asset quality is still a key risk for CIMB, we also note that loan loss reserves have been shored up significantly while capital has been relatively intact. Following the recent run-up in share price, we keep our MARKET PERFORM rating with a revised RM3.90 TP (from RM3.45).

3QFY20 PATMI slipped further to RM194m (-85% YoY, ex-MSS cost/- 30% QoQ), missing both our and consensus expectations with 9MFY20 net profit of RM979m (-74% YoY, ex-disposal gains and MSS costs) making up just 57%/51% of our/consensus FY20E PATMI. Key variances were: (i) RM255m impairments relating to the bond book (O&G names) in 3Q; and ii) effective tax rate of 61% as interest expense on certain debt securities were disallowed for tax deduction. Credit cost remained sticky at 165bps (2QFY10: 160bps; 3QFY19: 45bps) but 9MFY20 credit cost of 143bps (annualised) was within our 140bps assumption. As expected, there was no interim dividend.

Other highlights. Excluding modification losses of RM281m in 2QFY20, 3QFY20 pre-provision operating profit would have been up 12% QoQ but PBT down 5% QoQ due to higher impairments on both loan and bond books. NoII jumped 29% QoQ (-11% YoY) as improved activities during the quarter led to higher fee and flow-based income. Meanwhile, opex remained tightly controlled (+4% QoQ/-10% YoY, ex-MSS cost), which led to CIR dipping to 49% (2QFY20: 51%). Despite the improvement in asset quality (GIL down 7% QoQ thanks to broad-based decline across the region) and in the absence of chunky provisioning for an O&G account last quarter, loan provisioning was sticky due to higher pre-emptive provisioning of RM556m (2QFY20: RM495m) for macro-economic factor (MEF) and Covid-19 related provision (airlines and leisure sectors). Also, underlying loan provisions stayed high (RM963m vs. 2QFY20: RM975m) no thanks to its overseas commercial banking division, which include legacy names in Indonesia (steel) and Singapore (O&G). With the heavy provisions taken thus far, LLC improved to 94% from 82% in 2QFY20 (3QFY19: 77%). Elsewhere, loans expanded 2% YoY (-1% QoQ), deposit growth was 7% YoY (flat QoQ), underpinned by CASA (+24% YoY/+4% QoQ). CET-1 ratio was 13% while 9MFY20 reported ROE was 2.3% (annualised).

Key takeaways from conference call: FY20/2-year credit cost guidance raised to 140-150bps (from 120-140bps) and 160-210bps (from 150- 200bps), respectively. Some further MEF and top-up provision for legacy accounts are expected in 4QFY20, but these should be relatively low and thus, CIMB expects 4QFY20 credit cost to be lower QoQ. Management is also assessing its bond portfolio but could not comment on the size of the impairments as yet. Due to the revision in credit cost and bond impairments, ROE guidance was narrowed to 2-3% from 2-4%. Finally, with respect to the targeted repayment assistance programme announced in Budget 2021, CIMB said that the B40 segment made up 10% of its loan portfolio.

FY20E PATMI cut by 11%, as we assumed higher other impairments of RM600m (from RM200m) and higher effective tax rate of 25% (from 22%), mitigated by slightly lower opex. Our FY21E sees a minor adjustment from spill-over impact from the reduced FY20E opex. The projected rebound in FY21E PATMI hinges on: (i) lower impairments for both bonds (-50% YoY) and loans (credit cost of 100bps vs FY20E: 140bps), and (ii) rebound in economic activities leads to pick-up in loan growth and stronger client flows.

MARKET PERFORM maintained with revised TP of RM3.90 (from RM3.45). Our GGM-derived target FY21E PBV has been raised to 0.66x from 0.60x after we incorporate the following revisions: (i) risk-free rate assumption of 2.7% (from 3.0%), and (ii) 25bps reduction in market risk premium assumption to reflect recent vaccines developments for Covid-19. Although asset quality is still a key risk ahead, we do note that CIMB has been able to bulk up its loan loss reserves while keeping its CET-1 ratio intact (albeit with the help of writing back regulatory reserves and absence of interim dividends).

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 - 30 Nov 2020