Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with unchanged fair value (FV) of RM7.10/share based on FY24F P/BV of 1.0x supported by ROE of 10.7% with a premium of 3% based on our 4-star ESG rating.

• No changes to our earnings forecast.

• Overall net interest margin (NIM) is likely to improve slightl QoQ in 1Q24. This will be supported by higher interest margin in Malaysia and Indonesia, which more than offset Singapor and Thailand’s weaker NIM. In Indonesia, Niaga’s NIM improved 15bps QoQ to 4.2% as loan yield rose from reprising of lending rates upwards. This trend is likely to continue into 2Q24 Malaysia’s NIM improved in 1Q24 from a lower cost o wholesale and retail deposits. Cost of retail deposits in Malaysia declined, attributed to the initiative to gradually lowe FDs rates in campaign periods. This initiative started in Apr 2023.

• Moving ahead, room for further optimisation in cost of deposit for Malaysia is seen as limited in view of continued high interes rates in developed markets. In contrast, NIM in Singapor contracted QoQ in 1Q24 from reprising of FD rates and shift in customer deposits from CASA to term deposits. Meanwhile Thailand recorded a weaker NIM owing to higher cost of funds and change in asset mix.

• 1Q24 saw good traction for retail CASA in Malaysia due to payroll services for corporate customers while the group is tweaking its strategy to capture more non-retail CASA through the digital banking business solution, bizchannel.

• The group maintained its loan growth guidance of 5%-7% with domestic loans to grow by 5% in FY24. We expect overall loan growth for CIMB in 1Q24 to be on track with the guidance a both Malaysia’s banking system and Niaga recorded a loan growth of 6% YoY in 1Q24. Management alluded to cautiousl growing corporate loans to avoid compromising on margins with fine interest rates. Over the past 12 months, with 20bp increase on lending rates on mortgages, yields on loans fo purchase of residential properties have improved. However this initiative has resulted in a lower acceptance rate fo mortgage loans by 5%-10%.

• In 1Q24, asset quality of corporate loans continues to hold up with no downgrades in ratings of larger corporate borrowers On consumer loans, there were no deterioration in delinquenc rates. Nevertheless, in Thailand, the group is monitoring closel to manage the asset quality of vehicle (2 and 4 wheelers financing. We understand that there have been some pockets of weakness in Malaysia’s SME loans.

• 1Q24 is likely to see a good traction in non-interest income (NOII) QoQ, underpinned by an improvement in trading and fx income riding on market volatility and higher spreads, chunky NPL sales recorded by Niaga as well as higher consumer fee & commission income from wealth management and bancassurance business.

• The group’s results will be released on 31 May 2024. We expect the group’s 1Q24 net profit to be higher QoQ, supported by decent loan growth, slight improvement in NIM, higher NOII and stable credit cost. In FY24F, we have factored credit cost of 35bps. We have already seen significant improvement in the credit cost of the group and are unlikely to see much further improvement from the 30-40bps level going forward.

• We continue to like CIMB as a stock to benefit from foreign liquidity flows and stronger expectation of earnings growth going into FY25F. The stock now trades at 1x FY24F P/BV with an attractive dividend yield of 6%. Asset quality has improved with lower provisions while diversification of its revenue and portfolio-reshaping initiatives have contributed to a stronger core ROE. Optimisation of credit cost, capital and lower losses from digital assets invested are envisaged to uplift its earnings ahead. We gather that CIMB Philippines has reached a break-even point and will start to record profits while losses for Touch & Go Digital are narrowing.

Source: AmInvest Research - 7 May 2024