Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value (FV) of RM6.50/share pegging the stock to FY23F P/BV of 1.0x based on an ROE of 10.2%.

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

• Valuation remains attractive with the stock trading at 0.8x P/BV with a dividend yield of 6.1% for FY23F.

• Niaga, the Indonesian subsidiary, recorded a strong core net profit of Rp1.6tril (+32.4% YoY) and ROE of 15.1% in 1Q23, contributed by higher operating income and lower provision expenses. Provisions declined by 34.2% YoY. Preprovisioning operating profit (PPOP) in 1Q23 rose by 2.6% YoY, underpinned by stronger net interest (NII) while noninterest income (NOII) was flattish.

• In 1Q23, NOII decreased marginally by 0.9% YoY to Rp1.6tril. Higher fees, commission and loan recoveries were offset by a decline in fx and derivatives income as well as lower gains from sale of securities. In 1Q23, Niaga increased its holdings in government bonds and marketable securities by 5.8% QoQ.

• 1Q23 saw an improvement in net interest margin (NIM) by 25bps YoY to 4.71% with an increase in asset yields outpacing the rise in cost of funds (COF). 1Q23 NIM was within management guidance of 4.6%-4.8% for FY23. On QoQ comparison, NIM was compressed by 19bps, underpinned by higher funding cost from an increase in mix of time deposits as well as lower yields from cash and shortterm funds.

• We continue to see that the benchmark interest rate in Indonesia has peaked at 5.75% with potentially 1 more rate hike in US to a range of 5% to 5.25%. Niaga’s LD ratio improved to 82.2% in 1Q23 vs. 85.6% in 4Q22, attributed to a stronger customer deposit growth of 5.7% QoQ.

• Niaga’s loan growth in 1Q23 picked up pace to 10.1% YoY vs. 9.4% YoY in 4Q22, above the targeted 6-8% expansion for FY23.

• Credit growth was mainly driven by consumer, SME and corporate loans. For the consumer segment, auto loans, which were higher in yield, grew strongly by 20.6% YoY while credit cards, personal and other loans expanded by 12.4% YoY. 1Q23 saw an acceleration in corporate loan growth to 16.2% YoY vs. 12.1% YoY in the preceding quarter.

• Meanwhile, commercial loans registered a marginal growth rate of 0.6% YoY. This was an improvement compared to a contraction of 0.6% YoY in 4Q22 after the strategy to reposition its commercial loans.

• Niaga’s customer deposit was subdued with a growth of 1.2% YoY in 1Q23. Owing to higher interest rates, the shift in deposits from CASA towards time deposits (TDs) continued into 1Q23. This has resulted in a slip in CASA ratio from 63.6% in 4Q22 to 61.2% in 1Q23 while TD ratio climbed to 38.8 from 36.4% in the preceding quarter.

• Niaga's operating expenses (opex) rose by 5.4% YoY in 1Q23, driven largely by higher personal cost and other expenses. Owing to higher opex, its CI ratio rose marginally to 44.5% in 1Q23 (1Q22: 43.8%), still within management’s guidance of <45% for FY23.

• Credit cost declined to 1.5% in 1Q23 vs. 1.9% in 4Q22. Its loan loss coverage (LLC) surged to 253.3% in 1Q23.

• Niaga’s gross impaired loan ratio fell to 6.2% in 1Q23 vs. 7.1% in 4Q22. The Indonesian subsidiary’s gross NPL ratio decreased 20bps QoQ to 2.6%, contributed by NPL sales, loan recoveries and write-offs.

• As at end-1Q23, the amount of loans impacted by Covid-19 that were restructured and still active continued to be on a declining trend. It fell to Rp4.2tril vs. Rp4.8tril in 4Q22, representing 2% of Niaga’s total loans.

• Loans at risk (LAR) including those impacted by Covid-19 and still active declined further to 11% from 11.8% in the preceding quarter. Niaga’s coverage for LAR stood at 59.6% in 1Q23.

Source: AmInvest Research - 28 Apr 2023