CIMB on the right track

CIMB set to post strong earnings recovery

PETALING JAYA: CIMB Group Holdings Bhd is set to post strong earnings recovery this year, thanks to stable net interest margins (NIMs), cost savings and lower provisions.

However, the second-largest banking group in Malaysia is expected to endure another set of weak financial results for the fourth quarter ended Dec 31,2020 (Q4’20), before the recovery sets in.

This is due mainly to the group’s still-elevated provisions for the period in review, according to analysts based on a recent teleconference with CIMB chief financial officer Khairul Rifaie. (pic below)

The group will likely release its Q4’20 result on Feb 26.

TA Research noted in its report that CIMB’s upcoming Q4’20 results should continue to reflect concerns on asset quality.

“Expected credit losses on loans are expected to remain elevated due to: additional management overlays and macroeconomic variables adjustments in Malaysia (on the back of refinement in assumptions post blanket moratorium) and overseas operations namely Singapore, Indonesia and Thailand; (additional provisions for sectors impacted by Covid-19 (mostly in Indonesia and Singapore); and lastly top ups made on some legacy accounts, ” the brokerage said.

Nevertheless, the group’s overall credit charge on loans for the full year should fall within the management’s guidance of 140-150 basis points, it added.

Similarly, Maybank Investment Bank Research (MaybankIB) pointed out that CIMB’s Q4’20 results are expected to be weak, given that other (bond and derivative) provisions are likely to have remained elevated.

“Positive expectations for Q4’20 include stable quarter-on-quarter NIMs, still robust trading income and stable expenses. Credit costs on loans are also expected to be inline with previous guidance, ” the research house said.

“Nevertheless, Q4’20 is still likely to see elevated provisions for bonds and derivatives, ” it explained.

Noting CIMB would see sizeable provisions for non-loan-related assets, namely bonds and derivatives, for Q4’20, RHB Research explained both impairments were specific to two different borrowers – an oil and gas borrower for CIMB’s bond exposure and another borrower (from a Covid-19 vulnerable sector) for the derivative exposure.

“That said, management is of the view that these top-ups should be sufficient and no topping up is required in 2021, barring the current situation further worsening significantly, ” RHB Research said.

Both RHB Research and TA Research maintained their buy calls on CIMB, with a similar target price of RM5.10, while MaybankIB reiterated hold, with an unchanged target price of RM3.85.

UOB Kay Hian upgraded its rating on CIMB to buy, with a higher target price of RM4.54, compared with hold at RM3.48 previously.

“We sense a growing optimism from management on the group’s recovery prospects in 2021 despite the re-imposition of the movement control order (MCO), ” UOB Kay Hian said.

“CIMB is expected to deliver the strongest earning growth recovery among its peers at over 100% in 2021 as it was the hardest hit in terms of provisions in 2020. That said, we note that meaningful earnings recovery is only expected in the second half of 2021, ” it added.

MaybankIB said the 2021 outlook for CIMB looked positive, supported by expectations of stable NIMs, further cost savings, lower credit costs and the absence of/lower other provisions.

“These positives are reflected in our earnings, which we forecast to more than double in 2021, ” it said.

RHB Research said while CIMB’s management acknowledged the downside risk in asset quality (especially consumer loans) given the MCO 2.0, the recovery outlook has not materially changed.

“This is in line with our non-consensus view that despite the short-term earnings risks (potentially higher credit cost in 2021), the vaccine timeline and recovery outlook are still intact.

“While much of the discussion has been on the negative impact from MCO 2.0 (including the potential extension or tightening), we advise investors not to lose sight of the vaccine-induced recovery which is already on the horizon, ” it argued.

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