Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with a revised fair value (FV) to RM6.70/share from RM6.40/share after rolling over our valuation to FY24F. Our FV is based on FY24F P/BV of 1.0x supported by an ROE of 10.2%.

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

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

• CIMB Group’s 94.8% indirectly-owned CIMB Thai reported a higher credit cost of 1.13% in 1H23 vs. 0.7% in 1H22. The increase was attributed to the conservative provisioning for consumer loans with the absence of provision write backs in 1H22. As a result of the higher provisions, loan loss coverage of Thai subsidiary rose to 122.1%.

• Nevertheless, asset quality indicators have not deteriorated. 1H23 saw CIMB Thai’s gross NPL ratio improved to 3.1% in 1H23 vs 3.3% in 1H22, supported by portfolio recalibration efforts to exit from the commercial banking business in Thailand.

• Recall in 1H23, CIMB Thai reported weaker non-interest income (NOII) YoY due to lower net fees, service, trading and FX income. Moving into 2H23, NOII in Thailand is poised to improve on the back of stronger deal pipelines and business initiatives.

• The group is likely to register an improved net interest margin (NIM) in 2Q23 vs. 1Q23. This could see a narrower interest margin contraction in 2Q23. The improvement will be supported largely by the OPR hike of 25bps to 3% in May 2023 and the downward repricing of deposits starting from Apr 2023 which lowered funding cost in Malaysia. Pressure on the group’s cost of the funds has continued to gradually ease in 1Q23 and 2Q23 from 4Q22.

• For Thailand, NIM is poised to improve in 2H23 from higher asset yields. Also, NIM for Indonesia will be stronger in 2H23 underpinned by lower funding cost and better loan yields. This will improve from a compressed NIM in 2Q23 which saw funding cost in Indonesia rose from an increase in the mix of time deposits.

• Over in Singapore, NIM will be under pressure in 2Q23, attributed to an increase in cost of funds. Also, the initiative to increase NOII and optimise operating income via interest rate swaps will sacrifice a portion of the group’s NII in Singapore. With the continuation of higher funding cost from the maturity of deposits, the compression of NIM in Singapore is likely to continue into 2H23.

• Notwithstanding still-compressed overall NIM for the group in 2Q23, the interest margin is likely to further improve from 3Q23, contributed by a better outlook on interest margins in Malaysia, Thailand and Indonesia in 2H23.

• Loan growth in 2Q23 is likely to see a pickup in pace compared to 1Q23. This will be supported by chunky drawdowns of Wholesale Banking loans in the quarter.

• There were no concerns on the asset quality of loans to the construction and real estate sectors. Meanwhile, on consumer loans, we gather that delinquency rates have improved with a lower rate of increase in 1Q23 and 2Q23 compared to 4Q22. The delinquencies rates are likely to peak in 4Q23.

• As at the end of 1Q23, the group’s total provision buffers remained at RM2.9bil which comprised of RM2bil provisions raised as management overlays and the balance of RM900mil through the revision of MEFs. Management overlays for Malaysia amounted to RM1.4bil while that for Indonesia was RM350mil. These provision buffers continue to be seen as adequate to cover for any increase in delinquency rates on loans. Management hinted that it would minimise write backs of management overlays and reallocate a portion of Covid-19 overlays to other segments to cover for expected credit losses (ECL).

• On NOII, Malaysia is likely to see strong treasury and markets income and gains on the securities portfolio under the Group Funding division in 2Q23. In contrast, in Indonesia, there were lower opportunities for higher trade and fx income in 2Q23 vs. 1Q23.

• The Indonesian subsidiary, Niaga’s results are targeted to be announced on 31 July while the group’s results have been scheduled to be released on 30 August.

• We expect the group’s net profit in 2Q23 to improve compared to 1Q23. This will be supported by stronger net interest income (NII) from an improved NIM. Besides, NOII is likely to be higher in 2Q23, underpinned by improved trading, fx and other income (gains from sale of NPLs in Indonesia). We do not expect any negative surprises to provisions in 2Q23. Credit cost is expected to be still within management’s guidance of 45-55bps for FY23.

• We continue to like CIMB due to its attractive valuation trading at 0.8x FY24F PB/V with an attractive dividend yield of 6.2%. Asset quality has improved with lower provisions while cost takeout has contributed to its stronger core ROE.

Source: AmInvest Research - 26 Jul 2023