CIMB Thai’s asset quality to decline further on Covid-19 woes

by ASILA JALIL / pic by BLOOMBERG

CIMB Group Thailand’s asset quality is expected to deteriorate further due to the current economic woes surrounding the Covid-19 pandemic, said Hong Leong Investment Bank Bhd.

The research firm maintained a ‘Hold’ call on the company with an unchanged target price of RM3.30 based on 0.55 time its financial year 2021 price-to-book ratio with assumptions of 5.9% return on equity (ROE), 8.2% cost of equity and 3% long-term growth.

“This is beneath both its five-year average of 0.92 time and the sector’s 0.75 time. We feel the valuation is fair given its ROE output is three percentage points below its historical and industry mean,” it said

The research report noted that CIMB Thai’s risk-reward profile is balanced, given short-term Covid-19 headwind uncertainty, all the while trading at an attractive price point and decade low foreign shareholding level.

It also foresees the company’s net interest margin (NIM) to gradually recover in following quarters as the Bank of Thailand appears inclined to pause its monetary easing cycle, instead of preferring fiscal and credit measures to combat Covid-19 headwinds.

“However, their plan to switch to lower-yielding but safer assets will cap expansion.

“Separately, asset quality is set to deteriorate further given current economic woes. We understand the Thai economy is gloomy due to its large exposure to tourism and export sectors along with ongoing social unrest,” it said.

CIMB Thai’s core earnings for its third quarter ended Sept 30, 2020 (3Q20), dropped 77% year-on-year (YoY), dragged by bad allowances.

On a monthly basis, core profit decreased 73% mainly due to higher loan loss provision which increased 22%. Its net interest income shrank 11% as net loans fell 2%, while NIM was flat at 3.3%.

“Excluding non-performing loan sale gains in 3Q19, CIMB Thai posted 3Q20 core earnings of 82 million baht (RM10.9 million), which brought its nine-month sum to 1.5 billion baht (77% YoY).

“This was largely in line with our and consensus expectations, accounting for 83% to 85% of full-year forecasts. We believe loan loss provision will remain elevated in subsequent quarters due to impact from Covid-19 headwinds,” it added.

The research firm further added that CIMB Thai’s contribution to the overall group’s profit before tax is minimal at less than 10%, but given the two fraudulent oil and gas accounts which dragged Singapore’s performance; this has risen to 20%.