Investment Highlights

• We maintain our BUY call on CIMB Group Holdings (CIMB) with an unchanged fair value of RM6.50/share, pegging the stock to FY23 P/BV of 1.0x supported by an ROE of 9.7%. Our valuation reflects a neutral 3-star ESG rating.

• We make no changes to our earnings estimates following CIMB’s updates on the group through a virtual meeting on Monday.

• Loans that are under moratorium as well as rescheduling and restructuring (R&R) for the group continued to decline to 9% in Feb 2022 from 20% in Dec 2021.

• Malaysian consumer loans in moratorium and R&R have decreased to 10%. In March 2022, the percentage shrank further to just slightly above the mid-single digit. Thus far, out of the total expired repayment assistance (RA) loans for Malaysia’s consumer segment, only 1% has missed payments.

• Management alluded to potential upticks in loan delinquencies, particularly retail loans in the near term from the expiry of broad RA programmes. Nevertheless, we are comforted by the conservative provisions which the group has already set aside, totalling RM2.2bil. These comprised management overlays of RM1.6bil and provisions taken based on adjustments to macroeconomic variables (MEVs) of RM600mil.

• The group will likely consume some of the prudent provisions already booked in the event of an increase in loan impairments. Hence, this will not necessitate the requirement to further increase its provisions substantially.

• The group hinted that it will not be releasing the provisions based on MEVs as yet until stability is seen in the economic variables forecast. Any write-backs in provisions will most likely be only in 4Q22 or FY23.

• CIMB is conservative on its provisions for non-retail loans. It is monitoring the developments of several corporate borrowers which included loans related to the oil & gas sector in Malaysia and the steel sector in Indonesia.

• We do not expect the group’s total provisions in 1Q22 to be higher than 4Q21. This is in anticipation of lower loan provisions based on the tapering of the group’s loans under RA. 
  Also, any additional provisions related to the incident of double crediting of accounts (error in processing of remittances) will be much lower in 1Q22 compared to the RM281mil recognised in 4Q21. The group credit cost guidance for FY22 remains at 60–70bps, lower than the 73bps reported in FY21.
• The breakdown on the credit cost guidance of 60–70bps in FY22 by key markets are as follows:
  i. Malaysia: 30–40bps;
  ii. Indonesia: (CIMB Niaga: 210–230bps);
  iii. Thailand: (CIMB Thai: 130–140bps); and
  iv. Singapore: 10–20bps
• On the remittance error incident, the group will be adhering to the necessary legal processes in its suit against the account holders. Management sees that the group has a strong case in the lawsuits. We understand that the group has enhanced its internal controls for other similar remittance processes.
• The group has not seen any impact on its asset quality as yet from the recent inflationary pressures. On the group’s bond portfolio, management is comfortable on the holdings of securities with no imminent downgrade risks.

• 1Q22 is likely to see a moderate improvement in the group’s loans growth on a QoQ basis. The improvement will be driven by higher consumer loans in Indonesia and Singapore. Meanwhile, consumer loan growth in Malaysia improved marginally while that in Thailand registered a turnaround with a pick-up in retail loans in 1Q22.

• In respect of net interest margin (NIM), NIM in Malaysia is likely to improve modestly in 1Q22, contributed by a slightly higher loan yield and stable funding cost. In Malaysia, we maintain our expectation of a 25bps hike in the OPR from 1.75% to 2.00% in 2H22. Typically, a 25bps OPR rate hike will translate into a NIM expansion by 2bps and additional RM80–100mil in interest income on a full financial year.
  Over in Indonesia, Niaga’s NIM will continue to be compressed due to excess liquidity. Nevertheless, in 2Q22, Niaga has started to optimise its liabilities, and this is anticipated to improve the Indonesian subsidiary’s interest margin moving forward.

• Non-interest income (NOII) is likely to be slightly lower QoQ in 1Q22. Improvement in trading and fees from the consumer segment for Malaysia and Indonesia was offset by weaker income from the capital markets.

• The group is scheduled to release its 1Q22 results on 31 May 2022 while Niaga and CIMB Thai’s results are targeted to be announced on 28 April and 21 April 2022 respectively.

• We expect the group’s reported net profit in 1Q22 to be decent, supported by higher loan growth with no negative surprises on provisions. Meanwhile, overhead expenses remain tightly managed.

• The stock continues to trade at an undemanding valuation of 0.8x P/BV while its attractive dividend yield of 6.2% in FY23 is seen as supportive of its share price. We are positive on the improving fundamentals of the group with expectation of stronger earnings underpinned by higher operating income and lower provisions ahead.

Source: AmInvest Research - 20 Apr 2022