Investment Highlights

• We maintain BUY on CIMB Group Holdings (CIMB) with an unchanged fair value (FV) of RM6.90/share based on P/BV of 1.0x supported by FY24F ROE of 10.2%.

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

• CIMB’s Indonesian subsidiary Niaga recorded a lower 4Q23 core net profit of Rp1.57tril (-5.8% QoQ). The lower earnings were attributed to a weaker operating income partially offset by lower operating expenses (OPEX) and provisions. Net interest income (NII) declined QoQ as interest expense rose while interest income slipped in the quarter. Meanwhile, non-interest income (NOII) was flattish in 4Q23 with stronger fees, commission, gains from marketable securities offset by lower income from fx, derivatives and loan recovery.

• In FY23, Naga’s net profit rose by 28.4% YoY to Rp6.5tril driven largely by lower provisions as asset quality improved.

• FY23 NOII grew marginally by 0.8% YoY to Rp5.4tril driven largely by loan recovery partially offset by a decline in fx, derivatives income and gains from marketable securities. Fee and commission income was flattish in FY23.

• 4Q23 saw Niaga’s net interest margin (NIM) compressed by 28bps QoQ to 4.05%, attributed to a higher cost of funds (COF). We gather that the increase in COF was attributed to lower CASA ratio in 4Q23 as customers shifted funds to higher yielding time deposits as well as the impact of seasonal competition for deposits. FY23 NIM slipped by 29bps YoY to 4.40%, slightly below management’s guidance of 4.45%-4.55%.

• Loan yield continued to trend lower as Niaga was unable to fully pass on the increase in COF to its commercial and corporate loan borrowers. Also, we understand that mortgage loan rates in Indonesia have been more competitive with pressures coming from Buku IV banks that were requested by the regulator to raise their LD ratios.

• Niaga’s loan growth in 4Q23 accelerated to 8.5% YoY from 5.2% YoY in 3Q23, in line with management’s guidance for a growth of 6%-8% for FY23. Loan expansion was seen across all segments (consumer, corporate, commercial and SME segment). In FY24F, Niaga is targeting a lower loan growth of 5%-7% with a decreased target on corporate loans. Management alluded to political risk which could lower corporate borrowers’ capex spending in FY24F. The focus on loan growth in FY24F will be on growing consumer, SME and quality corporate loans.

• Niaga’s customer deposits grew modestly by 3.8% YoY, supported by growth in CASA (+4.3% YoY) as well as time and structured deposits (+3.0% YoY). CASA ratio inched higher to 63.9% in FY23 vs. 63.6% in FY22.

• OPEX of the Indonesian subsidiary remain well controlled with a growth of 0.6% YoY in FY23 as Niaga continued to benefit from structural cost take outs after the reduction of branches and ATMs in the previous fInancial years. Higher personal cost in FY23 was partially offset by lower tech and other expenses. A positive JAW of 0.2% YoY was recorded in FY23. Niaga’s CI ratio was sustained at 44.8% in FY23, within management’s guidance of <45%.

• Credit cost increased to 0.54% in 4Q23 vs. 0.37% in 3Q23. Nevertheless, for FY23, Niaga’s credit cost improved significantly to 1.0% vs. 1.8% in FY22. Niaga’s NPL coverage jumped QoQ to 292.1% contributed by improvement in asset quality while impairment coverage rose to 110.0% in 4Q23 vs. 108.8% in 3Q23.

• Niaga’s gross impaired loan ratio fell to 5.1% in 4Q23 vs. 5.9% in the preceding quarter while its gross NPL ratio declined 40bps QoQ to 2%.

• Loans at risk continued to decline to 11.2% in 4Q23 vs. 12.7% in 3Q23.

• For FY24F, Niaga’s management has guided NIM of 4.2%-4.4%. This reflects a potential downside risk to margins as COF is likely to remain elevated in the near term. Also, Niaga is aiming for a stable credit cost of 1.0-1.1%. Meanwhile, it is targeting for a CIR ratio of <45% for FY24F similar to FY23 and a ROE of 14-16%.

• We continue to like CIMB due to its attractive valuation trading at 0.9x FY24F P/BV with a dividend yield of 5.9%. Also, it is seen as a more liquid banking stock that will benefit from foreign fund inflows. Asset quality of the group has improved with lower provisions while diversification of its revenue and portfolio-reshaping initiatives have contributed to a stronger core ROE. Optimisation of credit cost, capital and lower losses from digital assets invested are envisaged to improve its earnings ahead.

Source: AmInvest Research - 22 Feb 2024