Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value of RM6.60/share, pegging the stock to FY23 P/BV of 1.0x supported by an ROE of 9.7%.

• No changes to our earnings estimates and our neutral 3- star ESG rating.

• Niaga, CIMB’s Indonesian subsidiary, recorded a higher core net profit of Rp1.3tril (+12% QoQ) in 2Q22 driven by a pick-up in net interest income (NII), lower operating expenses (opex) and provisions. Non-interest income (NOII) fell 8.5% QoQ in 2Q22 attributed to a drop in trading income (lower gains from marketable securities) as well as decline in FX and derivatives income.

• For 6M22, Niaga reported an improved underlying earnings of Rp2.5tril (+17% YoY) supported by stronger NOII, controlled opex growth and decline in provisions. This led to a stronger ROE of 12.8%.

• 2Q22 saw an improvement in net interest margin (NIM) of 17bps QoQ to 4.63% with the deploying of excess liquidity (cash and short-term funds) to expand loans. This has resulted in Niaga’s LD ratio rising to 80.9% in 2Q22 from 76.1% in 1Q22.

• Niaga revised its NIM guidance for FY22 to 4.65%–4.75% (previously 20bps below FY21’s margin of 4.86%). This is premised on the quarterly NIM improvement seen from stronger loan growth in 2Q22 which ramped up its LD ratio. In 2H22, management alluded to 2 potential rate hikes of 25bps each in Indonesia (1 in 3Q22 and another in 4Q22). However, the impact of the rate hikes will be neutralized by higher funding cost. Niaga is closely monitoring the trend of deposit cost.

• In 6M22, NOII climbed by 22% YoY underpinned by higher loan recoveries, FX and derivatives income partially offset by lower gains from sale of securities. 6M22 saw a decline in government bonds and marketable securities by 6.9% YoY. The duration of Niaga’s bond portfolio has been shortened to mitigate the impact from higher interest rates.

• The number and value of digital transactions through digital channels continued to rise. 
  With the increase in the number of digital transactions, Niaga’s cost per transaction for branchless banking tumbled by 16.7% YoY.
• Niaga’s loan growth accelerated in 2Q22 to register a growth of 3.8% QoQ and 9.4% YoY which were ahead of its target of 4.0–6.0% expansion for FY22. As a result of the strong loans momentum, management of Niaga has revised its FY22 loans growth guidance higher to 7–10%.
  Credit growth was driven by consumer, emerging business banking (EBB) and corporate loans. Credits cards also recorded a positive growth in 2Q22.
  Meanwhile, commercial loan growth stayed subdued with Niaga recalibrating its commercial banking portfolio. Moving forward, for commercial loans, it will focus on medium enterprises that offer better risk-adjusted returns.
  Niaga plans to accelerate the growth of consumer loans (mainly auto and mortgages) and EBB loans. Meanwhile, on corporate loans, it will focus on top-tier corporates, MNCs and state-owned companies.
• Niaga’s customer deposit growth decelerated to 6% YoY in 2Q22. This was contributed by the contraction in time deposits to manage funding cost while CASA grew 12% YoY. With a more favorable deposit mix, CASA ratio climbed to 65.7%. By focusing on capturing the main operating accounts of businesses, CASA from business banking grew 15.8% YoY while that from the consumer segment expanded by 8.1% YoY.

• On shariah banking, financing continued to expand strongly at 28% YoY while deposits shrank by 0.4% YoY.

• Niaga's opex fell by 1.2% QoQ in 2Q22 contributed by decline in IT and other expenses. For 6M22, opex grew 3.8% YoY underpinned by higher personal and IT expenses.
  6M22 JAWs were positive of 2.4% YoY with growth in income outpacing opex, leading to an improved CI ratio of 43.6%. FY22 CI ratio guidance for Niaga has been revised lower to below 45% from 45.9% earlier.

• Credit cost declined to 1.7% in 2Q22 vs. 1Q22’s 2.4%. For 6M22, Niaga’s credit cost stood at 2.1%, in line with the guidance of 2.1%–2.3% for FY22. Owing to improvement in credit quality, guidance for credit cost for FY22 has been revised slightly lower to 2–2.2%. Niaga has remained prudent on provisions with a high loan loss coverage (LLC) of 215%.

• Niaga’s gross impaired loan ratio decreased QoQ to 6.5% in 2Q22. Meanwhile, gross NPL for Niaga slipped 10bps QoQ to 3.5% in the quarter.

• As of end-2Q22, the amount of loans impacted by Covid-19 that was restructured and still active continued to be on a declining trend. It fell to Rp6tril vs. Rp7.5tril in 1Q22, representing 3.2% of Niaga’s total loans.

• Loans at risk (LAR) including those impacted by Covid-19 and still active fell slightly to 14%. Niaga’s coverage for LAR stood at 52% in 2Q22.

• Niaga’s ROE guidance for FY22 has been revised slightly higher to 11-13% from 11-12% previously.

• CIMB Group is scheduled to release its 2Q22 results on 30 Aug 2022.

• We expect CIMB Group’s reported net profit in 2Q22 to be decent, supported by robust loan growth and improved NIM. CIMB’s top line is expected to be stronger QoQ with stronger NII and NOII, partially offset by higher provisions set aside prudently while opex remain well controlled.

• The stock continues to trade at an undemanding valuation of 0.8x P/BV with an attractive dividend yield of 6%. In FY23, we are positive on the improving fundamentals of the group with expectation of stronger earnings underpinned by higher operating income and lower provisions.

Source: AmInvest Research - 28 Jul 2022