Investment Highlights

• We maintain our BUY call 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.

• CIMB provided updates on the group in a virtual meeting yesterday.

• Recall in 1Q22, the group’s non-interest income (NOII) grew by 11.9% QoQ. In 2Q22, we understand that CIMB’s NOII has expanded QoQ supported by higher fee income from loans and transactional banking as well as recoveries. These had offset weaker FX and trading income in 2Q22 due to the volatile market.

• Arising from yield movements in 1H22 which led to attractive bond valuations, the group saw opportunities to increase its holdings of FVOCI securities in 2Q22. Presently, the duration for its bond portfolio is 5–6 years. It has not changed dramatically.

• The group’s total Malaysia loans under moratorium and R&R (rescheduling & restructuring) as of end-June 2022 have decreased slightly to 4% vs. 5% in April 2022. Contributing to the improvement was the decline in Malaysia consumer loans in repayment assistance to 2% compared to 4% in April 2022. The percentage of Malaysia consumer loans that have missed payments was 2%.

• Overall asset quality for the group remained benign in 2Q22. On Malaysia consumer loans, we gather that in May 2022, there were slight upticks in missed payments due to the festive season. Nevertheless, in June, the payment arrears have been regularised. The NPL ratio for Malaysia consumer loans was slightly higher in 2Q22 vs. 1Q22.

• Regarding concerns on weaker demand and higher inflation rate, thus far, no weaknesses have been seen for SME loans as yet.

• The group’s credit cost guidance has been maintained at 60–70bps for FY22. 2Q22 is likely to see some slight increase in provisions QoQ on a net basis. The increase was due to adjustments of MEVs (macroeconomic variables) and further management overlays for consumer and business banking loans. On a comforting note, the increase in overlays in 2Q22 was not significant.

• The group hinted that it will not be releasing the provisions based on MEVs as yet until stability is seen in the MEV forecast. Meanwhile, any write-backs in management overlays will only be likely in FY23.

• In 1Q22, cumulative management overlays stood at RM2.5bil and the group has consumed a portion of it.

• Asset quality for corporate loan borrowers remained stable in 2Q22. On corporate borrowers related to the leisure and oil & gas sectors in Malaysia, there were no further top-ups of provisions in 2Q22 while allowances for potential credit losses have already been sufficiently provided for.

• Management alluded to sufficient capital buffers and ratios of above the regulatory requirements after the completion of the group’s recent stress test. The test took into account the effects of high interest rates, possibility of recession and conservative probabilities of 2 scenarios occurring.

• On the remittance error incident, the group has booked in the full provisions and is still proceeding to recover the monies. Hence there will not be any write-back in provisions in 2Q22 from this error in over crediting of deposit accounts.

• In respect of net interest margin (NIM), NIM in Malaysia is likely to improve modestly in 2Q22. This will be attributed to the 25bps OPR hike announced in May 2022. Typically, a 25bps OPR rate hike will translate into a NIM expansion of 2–3bps and additional RM80–100mil in interest income on a full financial year.
  Looking at the uptrend in interest rates, although deposit competition has been more intense lately with banks lengthening the duration of FDs to lock in funding for longer term, we gather that the pricing of deposits from campaigns was still rationale. In 2H22, in addition to the 25bps OPR increase announced in July 2022, we expect another 1–2 more rate hikes of 25bps each for the remainder of 2022. In our earnings estimates, we have baked in the impact of a 75bps rate hike in FY22F and another 50bps increase in FY23F.
  Meanwhile, NIM in Singapore will expand due to higher loan yield in 2Q22. Nevertheless, margins in Singapore will contract moving towards the end of FY22. This is due to the increase in funding cost from higher FD rates coupled with the shift in deposits from savings to FDs.

• Momentum for loans remained robust in 2Q22 with good traction of loan applications seen in July 2022.

• According to recent media reports, Touch ‘n Go (TNG), the operator of TNG eWallet has raised RM750mil through equity funding with investments from Lazada and other investors. This transaction will not have any impact on the group’s earnings as there will be no revaluation gains to be recognised in the P&L.

• The dividend reinvestment scheme (DRS) is expected to continue going forward. Nevertheless, the portion of dividends electable for the DRS is likely to be lower.

• Management is cautious on demand and asset quality in 2H22.

• The group is scheduled to release its 2Q22 results on 30 Aug 2022.

• We expect the 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 net interest income (NII) and NOII, partially offset by higher provisions set aside prudently while operating expenses (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