Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020

TO say that CIMB Group Holdings Bhd’s share price has taken a severe beating this year would not be an exaggeration, especially when compared with its peers. In all fairness, the country’s top five banks in terms of asset size have seen a decline in their share prices because of the disruption to the economy brought on by the Covid-19 pandemic, which has also hurt the ability of borrowers to repay their loans.

Yet, CIMB’s share price has been the worst hit when compared with its peers. Ranked No 2 in terms of asset size, the banking group has seen its share price tumble 41% since the start of the year. Last Thursday, it closed at a mere RM3.05, skirting close to its lowest level seen in a decade.

While this year has been an “exceptional” one for all businesses because of the pandemic, it is worth noting that CIMB’s share price has been on a decline since April 2018.

As the stock is currently trading at a cheap price-to-book value (P/BV) of 0.54 times, comparable with smaller banking groups such as Alliance Bank Bhd and AMMB Holdings Bhd, is this an opportune time for investors to buy into Malaysia’s second largest bank?

CIMB’s new group CEO Datuk Abdul Rahman Ahmad says the banking group’s shares are significantly undervalued. Nevertheless, the reason as to why the share price has been battered down, making valuations attractive, warrants an explanation.

In a nutshell, it is because the bank has under-delivered in terms of return on equity (ROE), sums up Abdul Rahman, who believes that if the ROE increases, the improvement will be reflected in the share price.

“If there is just a single metric that drives the share price or value, it is ROE. If you look at the leading banks that are trading above book value, their ROE are better than those of banks that are trading at or below book value. My focus is very simple — we need to improve our ROE,” he says.

To Abdul Rahman, for a bank like CIMB, which operates in different Asean countries, its ROE should be benchmarked against other top quartile banks, which based on existing benchmarks is currently at 12% to 13%. Over the past decade, the banking group’s ROE had fallen to 8.5% in 2019 from 15% in 2009. It recorded its highest ROE of 16.4% in 2011.

Tightly linked to its ROE is, of course, the bank’s earnings, which have come in below expectations in recent years, corporate observers say. A fund manager with a local investment bank believes that the poor share price performance over the last few years has had to do with its underwhelming earnings, depressed by lower earnings at its investment bank division as well as its Indonesian unit, CIMB Niaga.

Banking analysts echo similar views, attributing poorer earnings to CIMB Niaga’s weaker performance, which has resulted in the stock falling out of favour among investors. “Indonesia has been a challenging market for CIMB. The earnings haven’t been fantastic, although the growth in that market is promising. People call it ‘right asset, wrong time’,” notes PublicInvest Research analyst Ching Weng Jin.

The fund manager also believes that the current share price weakness of the banking group has been aggravated by expectations of potentially higher provisions ahead, owing to its exposure to certain vulnerable sectors amid the pandemic.

For the first half of the year, CIMB set aside RM2.4 billion in provisions, with a big portion of RM930 million for the oil and gas (O&G) sector; RM470 million for changes to macroeconomic variables and RM244 million for the Covid-19 impact.In 1Q2020, it provided RM430 million for an oil trader and another RM500 million in the following quarter for yet another oil trader.

The banking group’s gross impaired loan ratio had increased to 3.6% as at end-June from 3.1% as at December 2019. It expects provisions to remain elevated in 2H2020.

“Valuations, in terms of P/BV ratio, are cheap when compared with historical valuations and against peers. However, even at a current low P/BV ratio, investors are cautious about CIMB because of concerns of potentially higher non-performing loans from CIMB Niaga, owing to the state of the Covid-19 pandemic in Indonesia,” notes the fund manager.

In a Sept 23 report on CIMB, Hong Leong Investment Bank (HLIB) analyst Chan Jit Hoong said he would turn more bullish on the counter when its share price dips closer to the RM3 level as it would provide a higher margin of safety, given that the stock was then trading at RM3.12.

But when contacted recently, Chan says he now prefers to take a wait-and-see approach even though CIMB’s share price has dropped to a whisker above the RM3 level. “Unfortunately, the circumstances have changed, where domestic Covid-19 cases are on the rise again. This may throw a curveball to our earlier financial assumptions, preventing us from being more bullish. We prefer to wait and see for now.

“Share price performance is largely linked to financial showing. Investors have lost interest temporarily because of this [lacklustre earnings], coupled with a string of bad luck, such as incurring heavy losses on the two O&G accounts in Singapore. Once earnings start to recover, the share price will follow suit. I am not particularly worried.”

That said, experts see two areas that need improvement before investors consider a return to the banking group — asset quality and ROE. Chan believes the present management must be able to raise the ROE before the stock can regain investor interest.

PublicInvest’s Ching takes a different view as he believes that it is the asset quality concerns that have largely deterred investors from putting their money in the stock. “If there is one thing that could get investors to put their money in CIMB shares again, it would be an improvement in asset quality. In terms of earnings, it is a given, with most banks doing the same business under the same operating conditions. But if provisioning levels are high, it is something that could ‘damage’ any bank’s earnings,” he says.

Similarly, the fund manager believes interest will return once the pandemic is over, when earnings become more stable, without the worry of chunky provisions for vulnerable sectors and weak loan growth, especially in Indonesia.

As investors consider whether to give CIMB a shot, it is worth pointing out that its dividend payout ratio in 2019 was its highest in 10 years, at 56%, when shareholders were rewarded with a dividend of 26 sen per share.

 

 

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