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’s Indonesian subsidiary Niaga recorded a marginally higher 3Q23 core net profit of Rp1.67tril (+1% QoQ). The stronger earnings were driven by lower operating expenses (OPEX) and provisions. These offset weaker net interest income (NII) from higher cost of funds as well as lower non-interest income (NOII) from declines in treasury income and loan recoveries in the quarter.

• In 9M23, Niaga’s net profit rose by 27.6% YoY to Rp4.9tril, supported by stronger NII and NOII as well as lower allowances for loan losses.

• 9M23 NOII increased by 5.1% YoY to Rp4.3tril. Higher fees, commission, loan recoveries and gains from marketable securities were offset by a decline in FX, derivatives income and gains from marketable securities. In 3Q23, Niaga continued to increase its holdings in government bonds and marketable securities by 7.3% QoQ while lowering its cash and short-term funds.

• 3Q23 saw Niaga’s net interest margin (NIM) compressed by 19bps QoQ to 4.33%, attributed to a higher cost of funds (COF). 9M23 NIM slipped by 10bps YoY to 4.52%.

• Deposit rates continue to be on the rising trend in line with rate hikes in Indonesia. The latest rate hike of 25bps announced on 19 October 2023 raised the benchmark rate (7-Day Reverse Repo Rate) to 6% to defend the IDR currency against USD strength.

• Pressure continues to be seen on Niaga’s COF in 4Q23 and 1Q24 as deposit competition remains intense. Meanwhile, Niaga was not able to fully pass on the increase in funding cost to its commercial and corporate loan borrowers.

• Niaga’s loan growth in 3Q23 moderated to 5.2% YoY vs. 8.6% YoY in 2Q23, supported by growth in consumer, corporate and SME loans. This was lower compared to banking industry’s loan growth in Indonesia of 9.1% YoY as of end Aug 2023.

QoQ, loan growth for the Indonesian subsidiary was flat with the contraction in commercial and corporate loans offset by a marginal growth in consumer loans.

• Niaga’s customer deposit growth was subdued in 3Q23 at -0.2% QoQ. Growth in CASA of 3.5% QoQ was supported by Wholesale Banking CASA while time deposits (TD) contracted by 7% QoQ. With the shedding of expensive TDs, CASA ratio rose to 66.7% in 3Q23 vs. 64.3% in 2Q23.

• OPEX of the Indonesian subsidiary remain well controlled with a growth of 2.6% YoY in 9M23 driven largely by higher personal expenses. It recorded a positive JAW of 0.4% YoY with growth in operating income outpacing OPEX in 9M23. Niaga’s CI ratio improved marginally to 44.2% in 9M23 (9M22: 44.4%) and was within management’s guidance of <45% for FY23F.

• Credit cost declined to 0.4% in 3Q23 vs. 1.8% in 2Q23. For 9M23, Niaga’s credit cost improved to 1.2% compared to 1.8% in 9M22. Going forward, it will focus on growing consumer and SME loans while managing asset quality risk. Niaga’s NPL coverage rose slightly QoQ to 267.1% due to lower NPLs while impairment coverage stood at 108.8%.

• Niaga’s gross impaired loan ratio remained stable at 5.9% in 3Q23. The Indonesian subsidiary’s gross NPL ratio fell 10bps QoQ to 2.4%, supported by loan recoveries.

• Loans at risk continued its declining trend to 12.7% in 3Q23 vs. 13.3% in the preceding quarter.

• For FY23F, Niaga’s management has lowered its guidance for NIM to 4.45%-4.55% from 4.6-4.8% in view of rising COF. Also, credit cost guidance has been lowered to 1.1%-1.2% from 1.6%-1.8%. Meanwhile, guidance for loan growth has been maintained at 6%-8%. No changes to CIR ratio guidance of <45% and ROE of 14%-16% for FY23F.

• We continue to like CIMB due to its attractive valuation, trading at 0.9x FY24F P/BV 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 - 30 Oct 2023