Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value (FV) of RM6.70/share 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.

• Niaga, the Indonesian subsidiary recorded a stronger core net profit of Rp1.65tril (+4.5% QoQ). The stronger earnings were driven by modest growth in operating income, lower operating expenses (OPEX), partially offset by an increase in provisions. Provisions rose by 4.1% QoQ due to tweaks on macroeconomic variables (MEVs) for its mortgage loan portfolio. We understand that the forecast for house price index (HPI) was revised downwards, hence causing an increase in provisions.

• In 6M23, Niaga’s net profit rose by 27.6% YoY to Rp3.2tril underpinned by stronger net interest income (NII), noninterest income (NOII) and lower allowances for loan losses.

• 6M23 saw NOII increased by 4.6% YoY to Rp3.2tril. Higher fees, commission, loan recoveries and gains from marketable securities were offset by a decline in fx and derivatives income. In 2Q23, Niaga continued to increase its holdings in government bonds and marketable securities by 9.7% QoQ as opportunities continue to be seen for potential gains ahead.

• 2Q23 saw Niaga’s net interest margin (NIM) compressed by 19bps QoQ to 4.52% attributed to higher cost of funds (COF) and lower loan yield. Nevertheless, 6M23 NIM at 4.61% (+7bps YoY) was still within management guidance of 4.6%-4.8% for FY23. 2Q23 saw the release of the expensive time deposits (TD) to manage its COF. Moving into 2H23, Niaga’s NIM is likely to improve based on its strong focus in growing CASA and the potential ramp up of its LD ratio to 90% from the recent level of 86% as at end of 2Q23.

• Niaga’s loan growth in 2Q23 moderated to 8.6% YoY vs. 10.1% YoY in 1Q23 but was still above the targeted 6%- 8% expansion for FY23. It outpaced the banking industry loan growth of 7.8% YoY in Indonesia. Credit growth was mainly driven by consumer, SME and corporate loans. For consumer loans, growth was supported by expansion in auto, mortgages and unsecured loans. 2Q23 saw the continuation of strong growth in corporate loans. Meanwhile, commercial loan growth rate stayed muted at 0.9% YoY.

• Niaga’s customer deposits remain subdued with a growth rate of 1.6% YoY in 2Q23. Growth in CASA was flat at 0.6% YoY while TD grew at a slower pace of 5.8% YoY. With the shedding of expensive TDs, CASA ratio rose to 64.3% in 2Q23 vs. 61.2% in 1Q23. Consumer/Business Banking CASA ratio stood at 63%/65.5% as at end-2Q23.

• Operating expenses (OPEX) of the Indonesian subsidiary rose 3.7% YoY in 6M23, driven largely by higher personal cost and other expenses. It recorded a positive JAW of 0.9% YoY with growth in operating income outpacing OPEX in 6M23. Niaga’s CI ratio improved marginally to 43.3% in 6M23 (6M22: 43.6%), within management’s guidance of <45% for FY23.

• Credit cost rose to 1.8% in 2Q23 vs. 1.5% in 1Q23. For 6M23, Niaga’s credit cost improved to 1.6% compared to 2.1% in 6M22. Its NPL coverage remained healthy at 261.9% while impairment coverage stood at 110.7%.

• Niaga’s gross impaired loan ratio fell to 5.9% in 2Q23 vs. 6.2% in 1Q23. The Indonesian subsidiary’s gross NPL ratio decreased 10bps QoQ to 2.5% supported by recoveries and NPL sales.

• Loans at risk continued its declining trend to 13.3% in 2Q23 vs. 13.9% in the preceding quarter.

• Niaga’s capital adequacy ratio (CAR) climbed to 23.2% in 2Q23 vs 21.3% in 1Q23 as a result of a lower RWA from its participation in swap transactions.

• On Indonesia's Financial Services Authority (OJK) regulations for Indonesia’s conventional banks to spin off their Islamic Banking units moving forward, we understand that discussions are still ongoing with the authorities and management is still assessing the changes.

• For FY23, Niaga’s management continues to guide for a: i) loan growth of 6%-8%, ii) NIM of 4.6%-4.8%, and iii) cost to income ratio (CIR) of <45%. However, on credit cost, the guidance has been revised lower to 1.5%-1.7% from 1.6%-1.8% while ROE for FY23 has been raised to 14%-16% compared to 12%-14% previously.

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

Source: AmInvest Research - 1 Aug 2023