Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with unchanged fair value (FV) of RM6.70/share pegging the stock to FY23F P/BV of 1.0x and ROE of 10.2%.

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

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

• We gathered that there were no significant changes to the group and its Malaysian operation’s loans under the moratorium, restructuring and rescheduling (R&R) segment. Both percentages were still at 3%, similar to the end of July 2022. Also, the percentage of missed loans payments was unchanged at 6%.

• 3QFY22 is likely to see a mild uptick in delinquencies for consumer loans. The group has taken the opportunity to increase provisions conservatively for some borrowers in 3QFY22. This included provisions for commercial loans in Malaysia and the topping up for a legacy borrower related to the steel sector in Indonesia.

• In 4QFY22, the group is also looking into opportunities to raise pre-emptive provisions by adjusting macroeconomic factors (MEFs). Additionally, it is reviewing certain loan buckets to see if top up in management overlays would be necessary. Overall, from the tone of management, the group’s credit cost is expected to still be within the guided 50-60bps for FY22F.

• In the near term, some release of provisions are expected from borrowers making repayments, higher utilisation of facilities and loans that will be coming out of the 12- month observation period after the expiry of repayment assistance programme in 4QFY22. Nevertheless, the group intends to maintain its stock of pre-emptive provisions (MEFs and overlays) until the end of FY22. As a result, the group plans to refresh the MEFs in 4Q22 to conservatively raise provisions. Any significant write backs in management overlays will only be likely in FY23.

• Deposit competition has already been seen in Malaysia, Thailand and Singapore with rates rising between 5- 15bps depending on the segment and tenor of deposits. However, the positive effects of the consecutive interest rate hikes on net interest income (NII) and NIM are still expected to outweigh the impact of higher rates for fresh deposit funds from stiffer deposit competition in FY22.
  Recall on the sensitivity to interest rates in Malaysia, every 25bps increase in OPR would lift the group’s NII by 80- 100mil and NIM by 2bps. 
  Meanwhile, we gathered that the impact of higher interest rates to Indonesia, Thailand and Singapore operations will broadly be neutral. 
  Owing to the higher quantum of rate hikes in Malaysia in 2022 vs. 2023 while competition for deposits is expected to persist moving into next year, we expect an uplift in the group’s NIM by 5bps in FY22F and flattish interest margin in FY23F.

• CASA growth is expected to continue to be slower ahead in line with the industry trend. This is expected due to the shift in individual CASAs to FDs as a result of higher rates offered for time deposits in the market of late. Meanwhile, growth in CASA from SMEs has also slowed down recently.

• We expect another 25bps OPR hike in Nov 2022 and a further 25bps adjustment in Jan 2023, normalising the local benchmark interest rate to 3.00% (pre-pandemic level).

• Effective 1 Jan 2023, MGS and MGII holdings of banks will no longer be recognised as part of the regulatory authorities’ statutory reserve requirement (SRR) ratio of 2.0%. The flexibility granted earlier will end on 31 Dec 2022. The reversion to maintain deposits with BNM for the SRR requirement will have a slight negative impact on the group’s NIM.

• The group is scheduled to release its 3QFY22 results on 30 Nov 2022.

• We expect the group’s net profit in 3QFY22 to be decent. This will be supported by stronger NII from consecutive rate hikes in Malaysia, partially offset by softer NOII with the absence of lumpy IB fees and income from sale of NPLs and loans in Niaga coupled with higher provisions set aside prudently. We expect CIMB group’s operating expenses (opex) to remain well controlled with room for further cost take-out.

• Valuation remains attractive with the stock trading at 0.8x P/BV with a dividend yield of 6% for FY23F. We continue to be positive on improving fundamentals of the group with the expectation of stronger earnings underpinned by higher operating income, cost optimisation and lower provisions.

Source: AmInvest Research - 1 Nov 2022