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 10.1%. 

• No changes to our neutral 3-star ESG rating. We fine-tuned  FY23F/24F/25F earnings by -0.3%/+0.1%/+0.1% after tweaking  our net interest margin (NIM) assumptions.

• Foreign shareholdings of CIMB slid to 30.8% as at the end of  Mar 2023 vs. 31.1% in Feb 2023 (Exhibit 4).

• Cumulatively year-to-date (up until 12 May 2023), foreign  investors were net sellers on the stock. Meanwhile, local  investors (institutions and retail)/investment account and  proprietary traders were net buyers.

• The recent share price weakness stem from concerns on the  U.S. debt ceiling, credit conditions from the steep Fed rate  hikes as well as worries on growth and inflation outlook  globally. 

• CIMB is on course to meet its loan growth target of 5%-6% for  FY23. This will be supported by strong momentum for  Wholesale Banking loans in Malaysia and Indonesia which  saw loans grew 10.1% YoY in 1Q23 underpinned by expansion  of consumer, corporate and SME loans. Meanwhile, loans in  Thailand grew by a commendable 10.4% YoY in 1Q23.

• NIM compression in 1Q23 due to higher funding cost from stiff  deposit competition in Malaysia is expected to ease and  stabilise in the quarters ahead of FY23.

• This is premised on anticipated improvement in asset yield in  2Q23 from the recent OPR hike of 25bps on May 2023 to 3%  which will mitigate pressure on NIM. Also, the pressure on  cost of funds has been alleviating with FD promotional rates  being revised lower, thus becoming more rational towards the  end of Mar 2023. 

• We expect the OPR to remain at 3% for the rest of 2023 while the benchmark interest rate (7-day reverse repo) in  Indonesia is seen as already peaked at 5.75%. Over in Thailand, interest rate is at the tail end of the hike cycle with  potentially another 25bps rise for the remainder of 2023 from the present 1.75%. In our earnings estimate, we have  pencilled in an FY23F NIM compression of 5bps (management guidance: 5-10bps compression from FY22), largely  due to weaker interest margin in 1Q23.

• We do not expect any surprises to credit cost. Our forecast has taken into account an FY23F credit cost assumption  of 50bps, which is the middle of the guided range of 45-55bps for the financial year. 

• The 10-year MGS yield trended lower from 4.07% as at end of Dec 2022 to 3.91% in Mar 2023. This is anticipated to  result in marked-to-market gains on the group’s securities portfolio as well as provide room to monetise gains on  fixed income. As a result, the group’s non-interest income (NOII) will be stronger in 1Q23 with the improvement in  trading and FX income. As of 12 May 2023, MGS yield further declined to 3.64%, and this augurs well for the group’s  NOII to remain strong in 2Q23. The higher NOII will mitigate the impact of NIM compression on its net interest  income (NII).

• Although 1Q23 earnings are likely to be softer compared to 4Q22 due to the strong NIM compression, we see  sequential earnings improvement ahead based on i) lesser pressure on interest margins, ii) stronger NOII from  recovery in investment and trading income with the tapering of MGS yield as market reassesses the outlook on  interest rates, and iii) potential write-back of provisions based on expectation of some releases in management  overlays once the delinquency rate stabilises for the consumer loan portfolio. 

• The stock trades at low FY23F P/BV of 0.8x, below the 5-year historical average of 0.94x and offers an attractive  dividend yield of 6.1%. The group is scheduled to release its 1Q23 results on 31 May 2023.

Source: AmInvest Research - 17 May 2023