Optimistic On Recovery Prospects
Management sounded fairly optimistic on the group’s recovery prospects. In fact, we gather pre-emptive provisions could be peaking in 4Q21, while the level of loans under repayment assistance is expected to decline by a swifter-than-expected pace by 2Q22. We remain positive on the group’s recovery prospects with CIMB expected to deliver the strongest earnings growth among peers. Maintain BUY and target
price of RM5.95 (0.90x 2022/23F P/B, 8.5% FY22/23 ROE).
WHAT’S NEW
• URUS take-up rate and flood impact negligible. The take-up rate for the URUS programme remains very low, comprising of less than 1% of total Malaysian consumer loans (0.2% of group loans). The impact from the recent nationwide flooding in the form of flood relief assistance cost has also been negligible, while the support programs given are expected to be short term in nature compared to a structural impact from an economic downturn.
• Repayment assistance expected to decline sharply. The group’s outstanding repayment assistance comprises of 21% of total loans. As most of the loans under the PEMULIH moratorium programme is set to expire by 2Q22, management is expecting the overall group repayment assistance to decline sharply by 2Q22. As a baseline guidance, management is expecting the level of loans under repayment assistance to decline to 6% by 2Q22 (levels back in 2Q20 during the RMCO period). However, given the expectation of a stronger and more sustained economic recovery, management is fairly optimistic that the level of
repayment assistance could even drop lower than 6% by 2Q22 vs the current 21%.
• 4Q21 provisions outlook to rise qoq on more overlays. Net credit cost is expected to trend upwards qoq towards the 90-100bp level vs 3Q21’s 65bp. The expected qoq rise in net credit cost entails further build up in management overlays and specific provisions on selective corporate and commercial accounts in Thailand and Malaysia. However, this is broadly in line with earlier guidance and expectations bringing FY21 net credit cost to 75bp (2020:150bp).
• …but 2022-23 credit cost trajectory remains on the downtrend. More importantly, management is retaining its view that sufficient management overlays have been provided for in 2020-21 (estimated: RM3.6b). Consequently, management remains confident of a continued improvement in credit cost trajectory in 2022 and 2023. We have pencilled in an improvement in net credit cost of 65bp and 60bp in 2022 and 2023 respectively. Given that our net credit cost estimates for 2022-23 remain above the pre-COVID-19 average of 45bp, we foresee potential downside for credit cost in 2023.
ESSENTIALS
• NIM and interest rate outlook. Underlying NIM is expected to remain stable qoq (excluding impact of modification loss in 3Q21). NIM tailwind from Malaysia is expected to be offset by lower NIM from Singapore and Indonesia due to a pick-up in deposit competition. Management’s internal house view is for a 25bp policy rate hike in 2H22 in Malaysia, Indonesia and Thailand. This is expected to lift overall group NIM by roughly 2-3bp on an annualised basis. In terms of deposit competition, management is witnessing more material uptick in Singapore given the stronger loans growth outlook. However, in Malaysia, deposit competition remains benign and management only expects pockets of competition from smaller banks. The group is likely to exercise discipline in competing for deposits in Malaysia as liquidity remains abundant while loans growth recovery is not expected to be robust.
• Loans growth seeing improved momentum. Loans growth momentum has continued into 4Q21 and this momentum is expected to be sustained into 2022, driving a higher loans growth recovery well into 2022. Loans growth momentum is coming from both Malaysian and Indonesian operations. We have pencilled in a relatively conservative loans growth assumption of 3% and 4% for 2021 and 2022 respectively vs the pre-COVID-19 average of 6%. Given the uneven economic recovery, management indicated that they will remain selective on areas of growth and as such, we continue to factor in below pre-COVID-19 loans growth. In terms of areas of growth, Malaysia will be driven by: a) mortgages, b) auto, and c) SME, and Indonesia will be driven by mortgages. In terms of Thailand, management remains cautious and loans growth is likely to trend below the industry average.
• Non-interest income outlook. There has been some sequential improvement in trading income in 4Q21 off a low 3Q21 base effect to help stabilise non-interest income. Moving into 2022, management expects a stronger fee income growth recovery to help sustain its noninterest income growth.
• Opex to normalise upwards but remains manageable. The group has extracted RM380m in operating cost takeout and is targeting to potentially extract another RM120m in 2022 from both Malaysian and Indonesian operations. However, this will be partly offset by exceptional cost in the form of acerated depreciation of intangible assets (averaging RM50m/quarter) and further one-off staff restructuring expense from 4Q21 to 1H22. The benefits of these one-off cost rationalisations are only likely to take effect from 2023 onwards. All in, we have pencilled in opex yoy growth of 4/5% for 2021/22 respectively vs -1% in 2020. This is to factor in an expected upward normalisation in spending as the economy reopens. As such, near term opex is likely to normalise upwards toward the mid-single digit growth level.
EARNINGS REVISION/RISK
• No changes.
VALUATIONS AND RECOMMENDATIONS
• Maintain BUY and target price of RM5.95 (0.90x 2022/23F P/B, 8.5% ROE). Valuations remains relatively attractive at -0.5SD to historical mean P/B despite the strong share price run up while earnings growth recovery is expected to be the strongest among its peers. To smoothen out the effects of the Cukai Makmur on our earnings forecast, we peg our valuation to a blended average of FY22/23 operating metrics.