Fundamentals Intact – Opportunity To Accumulate On Recent Weakness
Management remains optimistic on its earnings growth recovery in 2022. Despite topups in provisions being required for certain corporate accounts, the overall provision
trend is expected to improve. Loans under repayment assistance have been holding up
better than expected, providing scope for potential write-backs in excess pre-emptive
provisions in 4Q22. Valuations are attractive at -1SD to the historical mean P/B.
Maintain BUY and target price of RM6.30 (0.98x 2022/23 P/B, 9.0% FY22/23 ROE).
WHATS NEW
• Strong legal ground against customers that have filed legal suit on double crediting.
There have been recent press reports on a group of 650 CIMB Group (CIMB) consumer
customers having filed a RM650m class-action suit against CIMB, relating to the group’s
double crediting error. However, management indicated that it had consulted with its legal
advisors and team on all the actions taken to recoup back some of the balances before
proceeding with such actions. As such, management believes that it has a strong legal case
against the customers that have filed for legal suits against the group.
• Tightened processes to prevent recurrence of double crediting issue. To prevent the
reoccurrence of the double crediting error which resulted in the double crediting of balances
into 11,800 retail customer accounts, management has streamlined and reduced various
internal processes which are deemed to be relatively manual in nature as this was
highlighted as one of the key issues resulting in the double crediting error. In addition, we
understand that it would have to report to BNM on the progress of its review and
effectiveness of the various control measures that will be instituted to prevent future
recurrence of the issue.
• Provisions from double crediting to decline sequentially. Management did not provide
details on the total amount that was double credited. However, they did indicate that even if
a full provision on the remaining balance is to be made, 1Q22 provisions relating to the
double crediting will still be lower qoq vs RM280m (net credit cost: 7bp) that has already
been provided for in 4Q21. Provisions relating to the double crediting have already been
incorporated in management’s 2022 60-70bp net credit cost guidance.
• Provisions for 2022 have also factored in additional top-ups for lumpy accounts. The
group is maintaining its 2022 net credit cost guidance of 60-70bp which remains above a
more normalised level of 48bp. The elevated credit cost is due to additional provision topups for large specific accounts relating to Malaysian O&G names, an Indonesian steel
account and a Malaysian leisure name which has already been fully impaired (ie classified
as stage 3). The group has already been setting aside provisions for these names in 4Q21
where net credit cost rose qoq to 76bp (3Q21: 57bp). The group’s O&G portfolio’s loans loss
coverage ratio stood at 84% as at end-Dec 21. Based on management’s net credit cost
guidance for 2022, we estimate that the top-up in specific provisions would raise the group’s
O&G portfolio LLC to an estimated 93% which does provide sufficient comfort. As such,
management had reiterated that 2022 net credit cost is unlikely to surpass is guidance.
• Provision top-ups are based on conservative assumptions. The driver of the still
elevated net credit cost guidance for 2022 (60-70bp) is largely attributed to top-ups in
provisions required for certain lumpy corporate accounts, which management indicated are
based on conservative loss given default assumptions and on full impairment assumption on
these accounts. Based on our back testing, the group’s O&G portfolio LLC could rise to an
estimated 93% in 2022.
• Provision assumptions have not reflected any write-backs. In addition to the already
conservative LGD assumptions for the provision top-ups that have been baked in for the
abovementioned corporate account for 2022, management has not written back any excess
management overlays and macroeconomic variable (MEV) even as asset quality of its loans
under repayment assistance is holding up better as Malaysian economic growth momentum
improves with the reopening of the economy. The group has built up RM2.2b in
management overlays and MEV (RM1.6b management overlay + RM600m in MEV). We
noted that some of its domestic peers have written back some MEVs in 4Q21. Management
alluded that any potential write-backs could trickle in by 4Q22.
• Providing scope for provisions to surprise on the downside? This provides scope for
management to reallocate a portion of any unconsumed overlays to the abovementioned
individual loan accounts that require provision top-ups and further provisions for its double
crediting error. As such, we do believe that there is certainly scope for overall group net
credit cost for 2022 to potentially come in lower than management’s 60-70bp guidance as
the group would not have to incur additional provision top-ups for these accounts which is
already inherent in its 60-70bp net credit cost guidance. We are retaining our 65bp and 55bp
net credit cost assumption for 2022/23 respectively. Every 5bp downside surprise to our net
credit cost assumption equates to a 3% positive earnings surprise.
• Level of repayment assistance continues to decline. The group’s overall
take-up rate for its loans under targeted assistance has declined to 9% as at end-Mar 22
from 19% as at end-Dec 21 as the repayment assistance programme in Malaysia continues
to unwind. Repayment assistance for consumer loans in Malaysia declined from 9% as at
mid-Feb 22 to slightly above single digit as at mid-Feb 22.
• URUS take-up remains low. The URUS take-up remains low at RM400m (0.1% of total
group loans). Management indicated that only 1% of domestic loans under repayment
assistance have missed payments (about 0.09% of total group loans). This is significantly
lower than initial expectations and does correlate with very low take-up rates for the URUS
programme to date.
• Loans growth momentum gains traction. Management alluded to a pickup in loans
growth momentum. Growth traction was seen in its consumer and business banking portfolio
in Indonesia and Malaysian consumers. We have pencilled in a recovery in group loans
growth from 3% in 2021 to 5% in 2022.
• Non-interest income outlook underpinned by strong fee income growth. Management
expects strong growth momentum in fee income across the whole of 2022 driven by credit
card-related fees, loans related disbursement fees and Bancassurance from Niaga.
However, investment and trading income could remain challenging as financial markets
remains volatile. On a qoq trend, management is expecting an improvement in trading
income driven largely by increased hedging and forex income while fee income is expected
to remain flattish.
• Opex growth to be well controlled. Management is guiding for mid-single digit opex
growth for 2022 and its cost to income ratio to maintain below 49%. 1Q22 opex trend
continue to remain well within its guidance. Increase in IT expenditure (+15% yoy) will be
partially offset by realisation of further identified structural cost takeout amounting to an
estimated RM200m-300m in 2022. Moving forward, management will continue to identify
additional structural cost takeout opportunities without discounting the possibility of potential
right sizing which we believe is a crucial element in helping the group achieve its Forward 24
goal of raising group ROE to 11.5-12.0% by 2024.
EARNINGS REVISION/RISK
• No changes.
VALUATIONS AND RECOMMENDATIONS
• Maintain BUY and target price of RM6.30 (0.98x 2022/23F P/B, 9.0% ROE). To smoothen
out the effects of the Cukai Makmur on our earnings, we peg our valuation to a blended
average of 2022/23 operating metrics. We view the recent sharp selldown in its share price
as an opportunity to accumulate with valuations having declined to -1SD below its five-year
historical mean and with strong earnings recovery remaining intact.