PETALING JAYA: A weak second quarter ending June 30 (2Q20) is seen for CIMB Group Holdings Bhd as lumpy credit costs and higher net interest margin (NIM) compression is expected to weigh on its bottomline.
However, the second half of the year should come in better for the country’s second largest lender on expectations of lower credit cost and NIM improvement.
In a report, Maybank Investment Bank Research said that CIMB’s 2Q20 credit cost is expected to remain elevated due to provisions of about RM500mil against another oil trader, plus further economic variable adjustments to reflect slower economic activity.
“Nevertheless, the group is still expected to meet its 100-120 basis points (bps) credit guidance for FY20 and management expects the cumulative credit cost by FY21 to average 150- 200bps, ” it said in a note to clients yesterday.
On its side, Maybank IB forecasts assumes 100bps credit cost for FY20 and 90bps credit cost for FY21, thus taking the bank’s cumulative credit cost to 190bps by FY21.
As for NIM, it noted that the bank’s 2Q20 NIM compression is expected to be higher than management’s earlier guidance of a 10-15bps contraction for the full year, due to the rate cuts and the one-off modification loss. For FY20, NIM is still expected to come in within the full year guidance, on expectations that the repricing of deposits would buffer the 1H20 impact, it said.
In 1Q20, CIMB’s absolute gross impaired loans (GIL) increased 10% year-on-year (y-o-y) and its GIL ratio rose to 3.4% from 3.1% in 4Q19. Credit cost jumped to 1.06% in 1Q20 from 0.66% in 4Q19 and 0.34% in 1Q19.
During the quarter, the banking group had put through a provision of about RM430mil against an oil trader which defaulted in 1Q20.
It had also put through an additional provision of RM100mil in Indonesia against a corporate in the wholesale sector.
“2Q20 is expected to see provisions of about MYR500m against another oil trader, as well as further economic variable adjustments to reflect slower economic activity.
“Meanwhile, Indonesia saw increased pressure across all segments. As a group, restructuring and rescheduling (R&R) loans are expected to account for 25-30% of total corporate loans by year-end. Pure airline exposure is RM1.5bil or 0.4% of total loans, ” it said.
On a brighter note, overheads are likely to decline 5-10% in FY20 due mainly to lower salaries and admin costs, which would provide some buffer to earnings.
The research firm said the bank’s common equity tier 1 or CET1 of 12% will likely be maintained. While management has not committed to dividends in FY20, it thinks that the dividend payout ratio of 40-50% will hold.
“But as we expect a sharp decline in earnings this year (-44% y-o-y), we also expect its absolute dividend per share to contract to 15 sen versus 26 sen in FY19 on a payout ratio of 53%.” As for return on equity (ROE) for FY20, the research firm’s forecast of 4.7% is within management’s guidance of 3-5%, albeit at the higher end.
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