CIMB Group (CIMB) reported another encouraging set of financials, with a 2QFY23 net profit of RM1.77bn (+38.5% YoY, +8.0% QoQ) contributing to a cumulative 1HFY23 net profit of RM3.42bn (+26.2% YoY). While slightly ahead of our estimates at 54% of full-year number but in line with consensus at 52%, we err on the side of conservatism and keep our estimates unchanged amid external-driven uncertainties. The steadier 1HFY12 performance was underpinned by better noninterest income contributions (+32.0% YoY and a normalized effective tax rate. We remain optimistic over the Group’s medium to long-term prospects, with further rewards reaped from its F23+ initiatives. Our Outperform call is affirmed with an unchanged dividend-derived target price of RM6.70. On an encouraging note and in line with the Group’s improved operational strength, management has raised the dividend payout ratio to 55% (from 40%-60% previously).

• Operating income expanded by +7.4% YoY to RM10.33bn, driven by strong non-interest income growth (+32.0% to RM3.16bn). Trading and foreign exchange income growth was most robust (+75.5% YoY to RM1.59bn). By business segment, commercial banking (+8.5% YoY to RM1.95bn) was a key contributor with overall improvements across all segments. Wholesale banking also saw healthy income growth (+7.2% YoY to RM2.97bn).

• Net interest margin (NIM) compression moderated during the quarter, down by only 4bps, with stronger loans growth mitigating the effects of elevated deposit costs (from intense competition) and treasury/market operations. Net interest income contracted marginally (-0.8% YoY) to RM7.17bn as a result of the margin weakness. Management expects to see margins compress between 15bps and 20bps this year, largely due to weakness in Malaysia.

• Loans growth (+8.3% YoY, +3.4% QoQ) was particularly robust, driven mostly by the wholesale banking (+11.2% YoY) segment. Country-wise, Malaysia’s (+4.7% YoY) growth was driven by the non-retail (corporate and SME) segment while Indonesia (+8.6% YoY) was lifted by the retail and corporate segments. Management is maintaining its loans growth target of between 5% and 6% for 2023.

• Asset quality weakness is largely under control with total 1HFY23 provisions easing 2.9% YoY to RM880m. Loan impairment for 2QFY23 was notably higher (+82.4%) QoQ however, due to lower release of overlays. Conversely, commitments and contingencies were lower QoQ due to release of overlays. A healthier annualized 1HFY23 loan loss charge of 38bps has resulted in management lowering FY23 guidance to between 40bps and 50bps (45bps55bps previously). Gross impaired loans ratio is at 3.3% (1QFY23: 3.2%) with allowance coverage slightly weaker at 91.6% (1QFY23: 94.2%) due partly to higher impaired loans in Malaysia’s consumer business.

Source: PublicInvest Research - 1 Sept 2023