KUALA LUMPUR (Feb 5): Affin Hwang Capital has upgraded its rating on CIMB Group Hodlings Bhd to "hold" from "sell", with an unchanged target price of RM4.20, as the management front-loads pre-emptive provisions in fourth quarter of 2020 (4Q20).
Its analyst Tan Ei Leen said in a note today she is of the view that CIMB basically took a large hit on its profit and loss in 2020, driven by its regional oil and gas (O&G) exposure and direct exposure to Covid-19 sectors.
"Though 2020 could be one of the worst years for CIMB in the past 10 years, we believe that the new management team has taken the precaution to set aside additional pre-emptive provisions (in 4Q20) in anticipation of the risk of weaker asset quality in 2021, thereby lowering expected credit loss (ECL) provisions in 2021," she said.
Based on her meeting with CIMB's management, she said, it will not be a surprise to see another quarter with elevated provisions on a year-on-year basis, though it could be similar to that in 3Q20.
"This is due to additional overlays and macroeconomic variable (MEV) adjustments to cover for potential asset quality risk in Singapore, Indonesia and Thailand, while seeing some adjustments in overlay in Malaysia (due to higher risk posed by the B40 group and reversals as the moratorium came to an end in September 2020)," she said.
At the same time, she also expects CIMB to take a hit on some loans that were directly impacted by Covid-19 in Indonesia (steel sector) and Singapore (OMV sector), albeit to a lesser extent in 4Q20 as management made some provisions on these legacy accounts in 3Q20.
Meanwhile, she said the unsecured segment (with respect to personal loans) in Malaysia and the Thai auto sector loan books are also facing higher asset quality risks, which might result in a higher net credit cost (NCC) in 4Q20.
According to Tan, CIMB's management does not expect a similar level of provisioning or NCC in 2021 given the strategy to further front-load these pre-emptive provisions in 4Q20 and thus keeping to its NCC guidance of 140-150 basis points (bps) in 2020 and 60-80 bps in 2021.
"Our assumptions are in line with management's and as such, we make no changes to our forecasts for 2020 to 2022 as we also expect a gross domestic product (GDP) recovery in 2021 (+6% year-on-year) vis-à-vis a 5.5% fall in GDP in 2020," she said.
She also noted that management is also not expecting a similar level of ECL for bonds in 2021 vis-à-vis 2020, though 4Q20 would still see a hit similar to that in 3Q20 (due to an O&G account).
There will also be sizeable provisioning on some derivatives exposure related to sectors impacted by Covid-19, she added.
"Our full-year 2020 net profit of RM1.43 billion implies a 4Q20 net profit of RM446 million for CIMB. We do not expect any major surprises based on guidance at a recent meeting where management maintained its net credit cost target of 140-150 bps for 2020," said Tan.
At 11.05am, CIMB fell four sen or 1.01% to RM3.91, valuing the group at RM38.67 billion.