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 and supported by an ROE of 9.7%. Our valuation reflects a neutral 3-star ESG rating. We make no changes to our earnings estimates.

• Niaga, CIMB’s Indonesian subsidiary, recorded a higher core net profit of Rp1.2tril (+19.9% YoY) in 1Q22. The improvement was driven by stronger operating income from an increase in non-interest income (NOII) and lower provisions.

• 1Q22 saw a decline in net interest income (NII) by 1.8% YoY. This was contributed by a compression in net interest margin (NIM) of 66bps to 4.46% in the quarter with lower loan yield.

• From 2Q22 onwards, Niaga’s NIM is likely to improve premised on: i) lower reversals of interest accruals for consumer and emerging business banking (EBB) loans with the end of repayment assistance; ii) increase in higher yielding auto loans; iii) potential materialisation of strong pipeline of corporate loan deals; and iv) further improvement in funding cost via a reduction of higher cost time deposits and growth in CASA to optimise liabilities.

• Non-interest income (NOII) climbed 22.3% YoY in 1Q22 underpinned by higher loan recoveries, gains from marketable securities and higher FX & derivatives income partially offset by weaker fees and commissions.

• The number and value of digital transactions through digital channels continued to rise. This led to an improvement in CASA balances which was positive for Niaga’s funding cost. Octo Friends launched in Aug 2021 for consumer lending has gained traction. 1Q22 saw 30% of mortgage deals acquired digitally through Octo Friends compared to only 2% in 1Q21.

• Niaga’s loan growth trended higher in 1Q22 to 5.3% YoY in line with its target of 4.0–6.0% expansion for FY22. Credit growth was driven by consumer (mainly mortgage and auto financing), EBB and corporate loans. New bookings for mortgage and auto loans have been encouraging. Meanwhile, commercial loan growth stayed subdued with Niaga recalibrating its commercial banking business.

• Niaga’s customer deposit growth accelerated to 18.6% YoY in 1Q22 underpinned by stronger CASA which grew 19.1% YoY. CASA ratio rose to 63.6% in 1Q22 vs. 61.3% in 4Q21. By focusing on capturing key operating accounts of businesses, CASA from business banking has grown commendably. Also, strong CASA growth momentum was seen from the consumer segment. Niaga remained flush with liquidity with a low LDR of 76.1%. Going forward, management alluded to a comfortable LDR of 80–85%.

• On sharia banking, financing continued to expand strongly at 17.4% YoY while deposits grew by 35.4% YoY. 1Q22 PBT for sharia banking climbed by 38.4% YoY.

• Niaga's operating expenses (opex) grew (+4.6% YoY) in 1Q22 contributed by higher personal and IT expenses. On a QoQ basis, with a higher income and decline in personal expenses, Niaga was able to front load some of its tech expenses in 1Q22. 1Q22 JAWs were positive of 0.4% YoY with growth in income outpacing opex. CI ratio improved modestly to 43.8% in 1Q22 vs. 44% in 1Q21.

• Credit cost increased to 2.4% in 1Q22 compared to 4Q21’s 2.1%. This was slightly higher than the guidance of 2.1%–2.3% for FY22. The increase in provisions was attributed to the end of repayment assistance for EBB loans as well as allowances for loan losses booked for certain non-retail loans. Niaga remained prudent on provisions with a high loan loss coverage (LLC) of 210.8%.

• Niaga’s gross impaired loan ratio was stable QoQ at 6.8% in 1Q22. Meanwhile, gross NPL for Niaga rose slightly to 3.6% vs. 3.5% in the preceding quarter contributed by certain EBB loans moving into the NPL status after the expiry of repayment assistance.

• As of end-1Q22, the amount of loans impacted by Covid-19 that was restructured continued to be on a declining trend. It fell to Rp20tril vs. Rp21.6tril in 4Q21, representing 11% of Niaga’s total loans.

• Loans at risk (LAR), including those impacted by Covid-19, declined to 19.7% from 20% in the preceding quarter. This has increased Niaga’s coverage for LAR to 64.8% in 1Q22.

• We expect Niaga to register a stronger performance with an improved ROE in FY22 underpinned by stronger loan growth and NIM from the optimization of assets and liabilities as well as stable credit cost.

• CIMB Group is scheduled to release its 1Q22 results on 31 May 2022. 1Q22 earnings are anticipated 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 the 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 expectations of stronger earnings supported by higher operating income and lower provisions ahead.

Source: AmInvest Research - 29 Apr 2022