PETALING JAYA: Following a dismal start in the first quarter of financial year 2020 (1Q20) and provisioning likely to remain elevated, analysts have cut CIMB Group Holdings Bhd’s earnings estimates for this year and next.
In light of the challenging environment, the banking group will continue to reprioritise a significant amount of its planned capex and other non-essential spending to contain costs.
UOB Kay Hian Malaysia Research said this measure had started to bear fruit in 1Q20 with operating expenditure remaining flattish while declining 6% quarter-on-quarter (q-o-q)
“However, this was insufficient to offset the weak revenue trends which led to cost-to-income ratio deteriorating q-o-q to 56.0% in 1Q20 from 54.6% in 4Q19.
CIMB’s 1Q20 core net profit fell 57% year-on-year (y-o-y) to RM508mil as loan loss provisions tripled, while trading income came in weak. The country’s second largest lender by assets delivered a low ROE of 3.7% – falling short of management’s 9-9.5% target.
During the quarter, the bank put through a provision of about RM430mil against an oil trader which defaulted in 1Q20. It also put through additional provisions of RM100mil in Indonesia for a corporate in the wholesale sector.
Maybank Investment Bank Research said it expected a further lumpy provision of about RM500mil in 2Q20 against another oil trader in Singapore. According to the research firm CIMB’s management guides for credit cost of 100-120 basis points (bps) for FY20, which is more than double its original guidance of 40-50bps.
“With lumpy provisioning likely to continue into 2Q20, investors are likely to remain cautious towards CIMB in the near term. We cut our FY20/21 earnings by 31%/14% on higher net interest margin (NIM) compression and higher credit costs, ” said Maybank Research, which has a “hold” on the stock with a 12-month target price of RM3.50.
TA Research, meanwhile, pointed out that the bank’s “management cautioned that despite modest growth targets set out earlier in the year, earnings may be adversely impacted by further policy rate cuts and a Covid-19 driven global economic crisis.
This would dampen prospects of ROE coming in the range of 9% – 9.5% on the back of total loan growth of 6% and loan loss charge of around 40-50bps, it said in a report yesterday.
Under its new mid-term Forward23 aspirations, CIMB had aspired to lift ROE to 12-13% by scaling up contributions in Indonesia through capturing market shares and reigniting growth engines.
However, for the remaining part of 2020, TA Research now foresees more efforts in terms of asset quality monitoring, and capital management and preservation. Additionally, there would be increased attention in cost management, where non-essential investments would be deferred to focus on efficiency, it added.
For now, analysts note that CIMB remains backed by a decent capital position.
Its common equity Tier 1 (CET1) capital ratio stood at 12.5% as at end-March after the bank took the opportunity of the flexibility granted by Bank Negara to allow banks to reverse its regulatory reserves to retained earnings to help shore up CET1 ratio.
UOB Kay Hian Research notes that CIMB is so far the only bank that has taken the opportunity of this flexibility. Its peers Malayan Banking Bhd and Public Bank Bhd have chosen to retain regulatory reserve buffers.
“The flip side is that this has led to a sharp decline in CIMB’s loans loss coverage ratio inclusive of regulatory reserves from 99% in 4Q19 to 76% in 1Q20 which may lead to upside risk to potential provision top-ups, ” said the research firm.
Shares of CIMB closed five sen down to RM3.42, giving the stock a market cap of RM33.93bil.
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