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 based on an ROE of 10.3%.

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

• Niaga, the Indonesian subsidiary recorded a lower 4QFY22 core net profit of Rp1.2tril (-8.3% QoQ) due to higher provision expenses. Provisions rose by 39.7% QoQ after topping up for 1 legacy corporate borrower related to the steel sector and raising contingency buffers for the retail and SME portfolio with the expiry of loan repayment assistance. Pre-provisioning operating profit (PPOP) in 4QFY22 rose by 5.1% QoQ, underpinned by stronger net interest (NII) and non-interest income (NOII).

• For 12MFY22, Niaga reported stronger underlying earnings of Rp5tril (+19.6% YoY) supported by higher NII, NOII and lower provisions. This led to a stronger ROE of 12.6%. Niaga declared a record dividend per share of Rp94.07 (+114% YoY).

• 4QFY22 saw an improvement in net interest margin (NIM) by 13bps QoQ to 4.9% with the increase in asset yields outpacing that of cost of funds (COF) in a rising interest rate environment. 12MFY22 NIM of 4.69% was within management guidance of 4.65%-4.75% for FY22. Management alluded that the benchmark interest rate in Indonesia has peaked at 5.75% with potentially 2-3 more rate hikes in US. Niaga’s LD ratio remained elevated at 85.6% in 4QFY22.

• In 12MFY22, NOII climbed by 20.3% YoY supported by higher loan recoveries, fees, commission, fx and derivatives income, partially offset by lower gains from sale of securities. 4QFY22 saw gains in marketable securities of Rp417bil vs. a loss of Rp45bil in 3QFY22 and an improvement in fees and commission income.

• Niaga recorded a positive JAW of 2.3% in FY22 with growth in operating income outpacing overhead expenses.

• Niaga’s loan growth in 4QFY22 tapered to 9.4% YoY from 10% YoY in 3QFY22 but was still within the targeted 7%- 10% expansion for FY22.

Credit growth was driven by consumer, EBB and corporate loans. For consumer segment, auto loans which were higher in yield grew strongly by 35.3% YoY while personal and other loans expanded by 22.3% YoY. Meanwhile, commercial loan growth stayed subdued with Niaga recalibrating its commercial banking portfolio. For FY23F, Niaga is targeting to grow its loans by 6%-8% with a focus on consumer, SMEs and corporate loans while it intends to expand the commercial loan book by 2%-3%.

• Niaga’s customer deposit growth contracted by 5.9% YoY in FY22. Owing to higher interest rates, 4QFY22 saw a shift in deposits from CASA to time deposits (TDs). This has resulted in a slip in CASA ratio from 67.7% in 3QFY22 to 63.6% in 4QFY22 while TD ratio climbed to 36.4%.

• Niaga's operating expenses (OPEX) rose in 4QFY22, driven largely by higher IT expenses and personnel cost. For 12MFY22, opex grew 5.1% YoY, underpinned by increase in personnel and tech expenses. Nevertheless, its CI ratio still managed to chalk up an improvement to 44.9% in 12MFY22 (12MFY21: 45.9%) in line with the target of <45% for FY22. This was contributed by a stronger operating income for the financial year.

• Credit cost increased to 1.9% in 4QFY22 vs. 1.3% in 3QFY22. For 12MFY22, Niaga’s credit cost of 1.8% was within management’s guidance of 2%-2.2% for FY22. We gather that 10% of Niaga’s provisions comprised of overlays. Its loan loss coverage (LLC) surged to 242.2% in 4QFY22.

• Niaga’s gross impaired loan ratio increased to 7.1% in 4QFY22, contributed by the impairment of loans to a borrower in the steel sector which had been restructured for the 2nd time. On a comforting note, adequate provisions have already been provided for this loan account. The Indonesian subsidiary’s gross NPL ratio decreased 80bps QoQ to 2.8%.

• As at end-4Q22, the amount of loans impacted by Covid-19 that were restructured and still active continued to be on a declining trend. It fell to Rp4.8tril vs. Rp5.3tril in 3QFY22, representing 2.4% of Niaga’s total loans.

• Loans at risk (LAR) including those impacted by Covid-19 and still active declined further to 11.8% from 13.4% in the preceding quarter. Niaga’s coverage for LAR stood at 56.8% in 4QFY22.

• Management of Niaga has guided for a NIM of 4.6-4.8% for FY23F. This is premised on an improvement in CASA ratio to 68% based on its various attractive proposition programmes and a slight increase in LD ratio to 86%-87%. We understand that deposit rates in Indonesia have stabilised in Jan and Feb 2023 after a stiff pricing competition in 4QFY22. Interest margin in 1QFY23 is likely to be compressed before improving in the subsequent quarters of FY23 with a lower funding cost. Also, Niaga’s management has guided for a credit cost of 1.6%-1.8%, signifying no significant increase in provisions and targeting an ROE of 12%-14% as well as a CI ratio of <45% for FY23F.

• Valuation remains attractive with the stock trading at 0.8x P/BV and a dividend yield of 5.5% for FY23F.

Source: AmInvest Research - 20 Feb 2023