Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

AFTER a washout 2020, CIMB Group Holdings Bhd could very well make a strong earnings comeback this year barring any unexpected setbacks.

CIMB, the second largest by assets of eight local banking groups, was the weakest performer in each of the quarters last year.

“With prolonged heavy provisioning and kitchen sinking into 4QFY2020, CIMB emerged as the worst performer in 2020, with core net profit sinking 70% year on year against a peer average of -22%,” Maybank Investment Bank Research observes in a recent report on the banking sector.

This year, however, given that much of the kitchen sinking appears to have been done, the research house expects CIMB’s net profit to more than double on the back of lower — albeit still elevated — credit costs and much lower bond provisions. It has a “buy” call on CIMB, with a target price of RM4.80.

The positive sentiment is shared by UOB Kay Hian Research. “We remain optimistic about the group’s strong earnings recovery prospects in 2021 on the back of a significant reduction in lumpy bond [impairments] and lower provisions. We expect CIMB to deliver the strongest earnings growth among peers, forecast at 201% in 2021,” it says in a March 1 report. It has a “buy” call and target price of RM5.10 on CIMB.

Bloomberg data as at last Friday showed that 10 analysts had a “buy” call on the stock, with an equal number recommending a “hold”, and just two, a “sell”. Those with a “buy” call had target prices ranging from as low as RM4.60 to as high as RM5.50.

The average 12-month target price was RM4.62, suggesting further upside from CIMB’s closing price of RM4.47 last Friday. At RM4.47, CIMB had a market capitalisation of RM44.4 billion. The stock has gained just 4.8% over the last 12 months.

Last year, the group’s net profit declined 73.8% to RM1.19 billion, coming in below analysts’ expectations, as it made up only 78% of consensus estimates. Core net profit (minus one-offs) fell 70% to RM1.43 billion.

The plunge in earnings was due to a combination of an almost four-fold increase in total provisions to RM6.79 billion and weak net income.

Some analysts are wary, however, about CIMB’s prospects, citing provisions as a wild card. While a recovery this year is definite, the extent of the recovery remains to be seen, as provisions could still be hefty, they say.

“We believe management will continue to aggressively provision against legacy and Covid-19-related loan/bond exposures in FY2021/22 as well, and so build in higher credit cost guidance for FY21/22 (90 basis points/80bps versus 80bps/60bps previously), weaker loan growth due to a focus on risk-adjusted returns instead of asset growth, and our earnings [forecasts] are cut 7%/13% for FY21/22,” says Nomura Research’s banking analyst Tushar Mohata in a March 1 report.

“While FY2021 is likely to see a recovery over FY2020, we believe near-term return on equity (ROE) will remain depressed, owing to Forward 23+ recalibration.” Forward 23+ is CIMB’s new strategy, under which it ultimately aims to be the “leading focused Asean bank”. Nomura maintained its “neutral” call on CIMB, but raised its target price by 70 sen to RM4.90.

“It will take time for CIMB to regain its previous ROE footprints, which is unlikely to be achieved within the next year without a significant turnaround in asset quality or some form of balance sheet optimisation,” AllianceDBS Research says.

CIMB’s gross impaired loans ratio worsened to 3.56% as at end-2020 from 3.37% three months earlier. Its exposure to oil and gas was about 2.5% of the group’s gross loan book of RM365.84 billion as at end-2020.

What the bank says

CIMB, in an email response to questions from The Edge, indicates that the group has turned the corner after last year’s weak financial performance.

“We anticipate significantly better financial performance in 2021 on the back of economic growth, with expected lower provisions and better top-line performance,” a spokesperson says.

The spokesperson notes that there were already signs of improvement in 4QFY2020, with good quarterly traction in the top line. Operating income in the quarter had increased 5.6% q-o-q to RM4.72 billion, supported by 10.3% growth in non-interest income and 3.8% growth in net interest income.

“That being said, given the resurgence of Covid-19 and the necessary restrictions until the majority of the population has been vaccinated, CIMB will maintain a cautious growth stance in 2021,” the spokesperson says.

“The group will be guided by our Forward23+ strategy, which will see us reshaping our portfolio, investing in key growth areas and transforming our business digitally. Enhanced risk management, prudent cost optimisation and targeted investments across the business will remain priorities as we seek to drive efficient growth and productivity.”

CIMB expects provisions to improve in 2021, with net credit cost projected at 80bps to 90bps compared with 146bps in 2020.

“This level of provision is still elevated, however, compared with our historical normalised level of credit cost of 40bps to 50bps, given the continued impact of Covid-19, especially on severely affected sectors such as tourism, leisure and property,” the spokesperson says.

Its areas of concern continue to be business owners, corporates and employees of those sectors that have been heavily affected by Covid-19.

“We hope that, with the restrictions gradually easing up, these sectors can progressively recover. In the meantime, it is imperative that affected customers in need of financial help come forward to discuss payment relief options with CIMB,” the spokesperson says.

This year will be the first full year of CIMB’s Forward23+ strategy. “We have already started to make progress, and with core programmes in place to ensure delivery of business outcomes, we are confident that we are on track to delivering on our ambition,” the spokesperson says.

Group CEO Datuk Abdul Rahman Ahmad recently told reporters that CIMB was targeting loan growth of 4% to 5% this year, which would come on the back of significant growth in consumer banking across the group, particularly in Malaysia and Indonesia. Last year, loans declined by 1%.

 

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