Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value (FV) of RM6.60/share, based on P/BV of 1.0x supported by FY24F ROE of 10%.

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

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

• Recall, the group recorded a strong loan growth of 8.3% YoY in 2Q23, contributed by higher disbursements of Wholesale Banking (WB) loans. In 3Q23, loan growth is anticipated to be slower QoQ in the absence of lumpy WB loan disbursements in 2Q23.

• Net interest margin (NIM) is likely to be stable in 3Q23 vs. 2.24% in the preceding quarter. Improved NIMs in Malaysia and Singapore will be offset by weaker interest margins in Thailand and Indonesia.

• For Malaysia, NIM has stabilised in 2Q23 from higher cost of funds in 1Q23 and 4Q22. This trend continued into 3Q23. Locally, deposit competition has stabilised and management saw the opportunity to lower FD rates by 10bps Apr 2023, 10bps in June 2023 and 5bps in Aug 2023, thus easing the pressure on funding cost. This initiative coupled with the full quarter’s positive impact on interest margin from the OPR hike of 25bps in May 2023 may have improved its 3Q23 NIM for Malaysia.

• We understand that 4Q23 is likely to see the year-end seasonal deposit competition recurring in Malaysia. CIMB has launched a FD campaign in mid-Oct 2023 to target deposits of 6-month tenure. 2 other banks have launched FD campaigns in 4Q23 with tenures stretching to early next year. The group’s NIM in Malaysia in 4Q23 is expected to contract QoQ.

• For Thailand, NIM has compressed due to the rise in funding cost while in Indonesia, some pressure has been seen on Niaga’s interest margin.

• Over in Singapore, NIM has improved QoQ. The rise in interest rates following the US Fed Reserve’s rate hikes in May and July 2023 has been partially offset by the volatility in income from treasury business.

• On concerns of the economic impacts from “higher for longer” interest rates in US, the group remained comfortable with the provision buffers which have already been set aside during the Covid-19 to weather through challenges. Recall as at end Dec 2022, the group’s total Covid-19 related overlays were RM2bil with the overlays for Malaysia amounting to RM1.4bil while that for Indonesia was RM350mil. For Malaysia, a majority of the RM1.4bil Covid-19 related overlays have been reallocated to cover the risk of other loan segments. The group has de-risked its loans by optimising the commercial loan book in Indonesia and continued to run down commercial loans in Thailand. CIMB will continue to monitor its asset quality closely. The group is not too concerned on foreign currency risk (weaker MYR against USD) of its customers as its clients are seen to have a strong interest coverage ratio and healthy leverage to weather FX fluctuations. Management has alluded to slower growth for its operations in Thailand, Indonesia and Singapore in 2024.

• Operating expenses (OPEX) are poised to trend higher in 3Q23 and 4Q23, contributed by higher technology cost. We understand that a higher CAPEX spend for 4Q23 has been approved.

• 3Q23 is likely to see lower non-interest income (NOII) QoQ despite higher fees and commission income from its WB segment. The decline will be contributed by lower treasury and fx income from a high base in 2Q23 as well as due to weaker other income in the absence of the high NPL sales of CIMB Niaga and Thai in 2Q23.

• The Indonesian subsidiary, Niaga’s results are targeted to be announced on 27 October while the group’s results have been scheduled to be released on 30 November.

• We expect the group’s net profit in 3Q23 to be softer compared to 2Q23 due to slower loan growth, lower NOII from a decrease in trading, FX and other income (decrease in gains from sale of NPLs in Indonesia and Thailand) coupled with higher OPEX. We do not expect any negative surprises to credit cost in 3Q23.

• We continue to like CIMB due to its attractive valuations, trading at 0.8x FY24F PB/V with a dividend yield of 6.4%. Asset quality has improved with lower provisions while cost take-out has contributed to stronger core ROE.

Source: AmInvest Research - 25 Oct 2023