This article first appeared in The Edge Malaysia Weekly on May 18, 2020 - May 24, 2020

CIMB Group Holdings Bhd is in for a rough ride this year with provisions seen spiking, particularly from its exposure to two problematic oil and gas (O&G) accounts and deteriorating asset quality at its Indonesian bank.

It is expected to take a hit in the first half of this financial year ending Dec 31, 2020 (FY2020), by making full provisions of about RM1 billion for the two accounts, which are widely understood to be that of Singapore-based O&G traders Hontop Energy (Singapore) Pte Ltd and Hin Leong Trading Pte Ltd.

For perspective, this would already be more than half of the group’s RM1.64 billion loan provisions for the whole of FY2019.

“We remain wary of CIMB’s asset quality due to the O&G portfolio. Once these two accounts are provided for, theoretically there shouldn’t be any more of a concern with the portfolio; but then again, it’s hard to know for sure, since we never anticipated these two either,” a banking analyst tells The Edge, citing concerns stemming from the current oil price slump.

The country’s second largest banking group by assets is expected to announce its first-quarter financial results on Friday (May 22). Analysts are projecting a year-on-year decline in the 1QFY2020 earnings.

Without citing client names, CIMB recently guided analysts that a full provision of less than RM500 million would be booked in the first quarter for an O&G trader with a strong parent company in China. Another provision, reportedly about RM530 million if made in full, would be booked in the second quarter for the other O&G trader.

Analysts believe that the first-quarter provision is for Hontop Energy, while the other is for Hin Leong.

“[CIMB] is still contemplating if it will provide fully for the second provision as the loan is secured, but the likelihood of a full provision is high,” UOB Kay Hian Research says in an April 29 report.

“Factoring in the above provisions and a pick-up in expected credit loss, we raise our 2020-2021 net credit cost assumptions from 47 basis points and 50bps respectively, to 87 bps and 65bps. This essentially assumes a y-o-y doubling in group provision in 2020, and for 2021 provision to remain elevated,” it adds. UOB expects CIMB’s net profit to decline 31% this year, before recovering sharply by 29% in FY2021. Last year, CIMB reported an 18.3% drop in net profit to RM4.56 billion.

Both oil traders ran into problems with their loan commitments following the recent collapse in crude oil prices. Hontop Energy, a unit of China Wanda Group, is reportedly negotiating directly with banks on managing its debts, while Hin Leong has been placed under the management of a court-appointed supervisor while restructuring billions of dollars of debt.

CIMB’s exposure to the O&G segment as at end-2019 was small at 2.3%, or about RM8.5 billion, of its overall loan book. The gross impaired loan (GIL) ratio in that segment was 30%, the highest among the local banks.

It is worth noting that, percentage wise, CIMB’s exposure to the O&G segment is not too different from that of its rivals Malayan Banking Bhd (Maybank) (2.8% of total loans) and RHB Bank Bhd (2.4%).

It is understood that Maybank and RHB do not have any exposure to Hontop Energy and Hin Leong. Maybank, however, has around US$118 million (about RM513 million) exposure to Agritrade International, a Singapore commodities trader that was placed under interim judicial management in February. Maybank is due to announce its first-quarter results on Thursday.

Nevertheless, analysts say while they are also concerned about asset quality issues that could crop up at Maybank and RHB, the worry about CIMB is compounded because of its Indonesian operation.

“On top of the O&G exposure, there is also concern about its exposure to Indonesia, which is much bigger than Maybank’s,” says Chan Jit Hoong, a banking analyst at Hong Leong Investment Bank Research. Indonesia accounts for about a fifth of CIMB’s earnings, as opposed to 6% for Maybank. Chan nevertheless has a “buy” call on CIMB  given its inexpensive valuations.

The Indonesian lender, PT Bank CIMB Niaga Tbk, has so far held up well in the first quarter — it reported an 11.8% y-o-y rise in net profit to IDR1.05 trillion (RM306 million) last week — but analysts expect a deterioration in numbers and asset quality in the next few quarters.

“With the country risk for Indonesia higher versus Malaysia [amid the Covid-19 pandemic], the potential weakness in asset quality for consumer and corporate loans in the remaining quarters of FY2020 is an area of concern,” says AllianceDBS Research in a report.

As it stands, CIMB Niaga’s GIL ratio jumped to 4.4% as at end-March from 3.8% three months earlier. Meanwhile, the special mention loans ratio climbed to 8.1% from 4.95%. The bank has guided that credit costs could rise to about 1.8% to 2.3%, from an expectation of 1.6% to 1.8% before.

What the bank says

CIMB acknowledges that FY2020 will be challenging given the Covid-19 pandemic, but it is confident of its ability to withstand any shocks.

“CIMB is unable to comment on individual clients. With regards to the O&G sector as a whole, our exposure is not significant relative to the total loan book and is highly diversified across the sector. Furthermore, the group would like to emphasise that, as a listed regional banking group, it operates within strict guidelines and regulations in accordance with industry best practices, and is governed by the relevant regulatory bodies and central banks across our core markets, including Malaysia, Indonesia and Singapore,” it says in an email response to questions from The Edge.

“We foresee the year to be a challenging one, given the global pandemic. However, we remain confident of our ability to withstand any negative shocks given our well established franchise and strong capital base.”

According to analysts, CIMB’s direct exposure to sectors vulnerable to Covid-19, including hospitality, aviation, retail and gaming, was 5.4% of total loans. However, including the indirectly impacted sectors such as real estate, O&G, construction and plantation, its potential exposure could rise to 21%.

Analysts mostly have a “buy” or “hold” call on the stock, which has shed 32.8% year to date. It closed at RM3.46 last Friday.

“At 0.58 times the estimated 2020 price-to-book value (below its 10-year historical trough of 0.8 times), the market has largely priced [the two O&G provisions] in. We expect a strong 29% recovery in net profit in 2021,” says UOB Kay Hian, which has a “buy” call on the stock, with a target price of RM4.35.

Affin Hwang Capital Research, however, has a “sell” rating on CIMB and a RM2.60 target price. “We maintain our 2020-2022 forecast earnings, in which we have factored in a recessionary outlook for the group in 2020, including flat loan growth, net interest margin at 2.3% and credit cost at 75bps,” it says in a May 12 report.

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