Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value (FV) of RM6.70/share, pegged to FY23F P/BV of 1.0x based on an ROE of 10.3%.

• 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 understand that competition for deposits continued to persist moving into the 4Q22. It was more intensive in 4Q22 than 3Q22 with higher FD rates offered by banks through campaigns. As a result of the increase in FD and wholesale money market deposit rates coupled with the reprising of matured deposits in response to the 100bps cumulative OPR hikes in 2022, the group’s cost of fund (COF) rose in 4Q22.

• With the rise in interest rates, higher deposit rates were seen across the key markets (Malaysia, Indonesia, Thailand and Singapore). On a comforting note, the increase in funding cost in 4Q22 was cushioned by higher interest income in Malaysia and Singapore from consecutive interest rate hikes as well as in Indonesia with the deployment of Niaga’s excess liquidity to expand loans. Singapore is likely to record a strong NIM expansion in 4Q22 as its interest rate tracks closely to the rise in Fed fund rate in the US.

• Competition for deposits domestically is now seen as stabilising. We expect it to ease ahead with the moderation in the industry’s financing growth, resulting in lesser pressure on banks’ funding costs.

• Management alluded to potentially 2 more rate hikes of 25bps each in 1H2023 for Malaysia. This compares to our economics team’s expectation of only 1 more increase in the OPR in 2023 by 25bps to 3%. The group remains cautious on the outlook on COF. We are maintaining our NIM expectation of a 5bps expansion in FY22F and flattish interest margin in FY23F.

• Overall asset quality is expected to remain stable in 4Q22 with no significant increase in delinquencies of nonretail loans. Meanwhile, for the Malaysian operation’s retail loans, upticks in delinquencies are expected postexpiry of the broad loan repayment assistance programme, normalising to pre-pandemic levels. Also, the percentage of missed loan payments domestically remained close to 6%.

• 4Q22 is likely to see a QoQ increase in provisions. The group has taken the opportunity to raise pre-emptive provisions by revising macro-economic factors (MEFs). Also, it has conservatively increased its provisions for Malaysia and topped up allowances for potential credit losses for a legacy loan related to the steel sector in Indonesia. We do not expect any negative surprises to the guided FY22F credit cost of 50bps-60bps, which will be lower than the 73bps reported in FY21.

• The group is expected to maintain its stock of provision buffers in 2023F to mitigate the impact of any economic headwinds on asset quality. Hence, no significant writeback of provisions is expected in FY23F.

• The Indonesian subsidiary, Niaga’s results are targeted to be announced on 17 February while the group’s results have been scheduled to be released on 28 February.

• We expect the group’s net profit in 4Q22 to be decent. This will be supported by stronger interest income, which will be offset by higher interest expense from an increase in funding cost as well as improvement in non-interest income (NOII). This is expected to be underpinned by stronger fee income from Wholesale Banking and better trading income. Meanwhile, allowances for loan losses will increase in 4Q22 vs. 3Q22. With the anticipated end to the Fed rate hike in 1H2023 and the tapering of MGS yield, we expect investor sentiments to improve ahead. We see a recovery in the treasury and markets income fuelling the recovery of IB business in 2H2023.

• Valuation remains attractive with the stock trading at 0.9x P/BV with a dividend yield of 5.5% for FY23F. We continue to be positive on the improving fundamentals of the group with the expectation of stronger earnings, driven by higher operating income, cost optimisation and better asset quality.

Source: AmInvest Research - 27 Jan 2023