CIMB’s earnings to be compressed by slew of OPR cuts in FY20


MULTIPLE Overnight Policy Rate (OPR) cuts will hit CIMB Group Holdings Bhd’s net interest margin (NIM) across its major markets.

AllianceDBS Research Sdn Bhd analyst Chin Jin Han said tighter liquidity and deteriorating global economic activity due to coronavirus pandemic would narrow the bank’s earnings.

“Rate cuts in Malaysia will weigh heavier on the group given its substantially larger footprint, at more than 40% of total NIM.

“In Indonesia, near-term NIM will be supported by rate cuts, but eventually this will normalise as loans are repriced,” he noted in a research note last week.

Chin said given the potential for additional monetary policy action down the line to support economic growth, there is downside risk to CIMB’s guidance of five-basis-point (bp) compression which assumes two rate cuts in Malaysia and Indonesia.

He added that a 25bps reduction in the OPR would reduce NIM by two to three bps on an annualised basis.

Chin also said CIMB had initially targeted a 6% loan growth target for 2020, sensitising half the group’s loan growth target would translate to a 2% decline in financial year 2020 (FY20) earnings forecast.

AllianceDBS expects CIMB’s prospects in its major regions to be buffeted by fewer revenue opportunities and heightened asset-quality concerns.

Its credit demand is expected to thin as the Covid-19 pandemic pummels economic growth globally, while margins across Malaysia, Indonesia and Thailand will be compressed from policy actions geared at supporting growth and affordability.

He added that CIMB’s asset quality will be a substantial concern given the liquidity squeeze on businesses amid mandatory lockdowns and shrinking demand.

“We had maintained that banks with large corporate exposures could also see additional risk given the declining debt protection metrics and higher leverage.

“In this sense, we expect CIMB to book higher provisions from its exposure to a recent bankruptcy case in Singapore,” Chin said.

AllianceDBS Research is more bearish on CIMB’s prospects, likely from more conservative views on margins and credit costs.

He said CIMB’s return-on-equity accretion will drive the stock’s valuations, which may be achieved through substantial revenue uplift — from a return in capital market activity or a ramp-up in returns from the group’s transformation initiatives — or corporate actions optimising the group’s capital footprint.

AllianceDBS Research maintains a ‘Hold’ recommendation on CIMB with a lower target price of RM3.60.

It cuts CIMB’s FY20 to FY22 earnings forecast by 8% to 11% after imputing an additional rate cut in Malaysia, weaker loans growth and higher credit costs.