CIMB Niaga’s 3QFY23 net profit of Rp1.67tln (+24.6% YoY, +1.6% QoQ) got a lift from notably lower loan loss provisions (-74.1% YoY, -68.1% QoQ) as weak capital market conditions weighed on its non-interest income (-21.9% YoY, -29.4% QoQ). The bank’s prudent stance in judiciously growing its portfolio in recent years jas resulted in a better outlook on asset quality, with management lowering its credit cost guidance to between 1.1% and 1.2% (from 1.6% to 1.8% previously). Rising deposit costs sees net interest margins guidance lowered. We remain affirmed over CIMB Niaga (and the Group’s) longer-term prospects, underpinned by its growth initiatives. We maintain our Outperform call with an unchanged target price of RM6.70.

• Operating income of Rp4.49tln (-6.2% YoY, -10.9% QoQ) in 3QFY23 was weighed by significantly lower non-interest income contributions. (+2.0% QoQ). Losses in marketable securities and weaker loan recoveries (-64.5% QoQ) were primary contributors to the weakness. Income growth will continue to be supported by momentum in its key business focus areas, particularly areas with the highest risk-adjusted returns – consumer and SME segment.

• Net interest margin (NIM) compressed by another 19bps QoQ to 4.33% (2QFY23: 4.52%), as rising funding costs outstripped improvements in loan yields. On this note, management has lowered NIM guidance to between 4.45% and 4.55% (from 4.6% to 4.8%), with Bank Indonesia’s recent surprise move to raise policy rates also taken into consideration. Management intends to expand its CASA franchise further, both in the retail and non-retail segments to defend its funding costs (CASA ratio: 66.7% @ 3QFY23)

• Loans growth momentum slowed to +5.2% YoY (2QFY23: +8.6%) as management shifted gears on its corporate segment (-2.5% QoQ) amid repayments. The consumer space (+5.9% YoY, +1.2% QoQ) continues to underpin the overall portfolio however, with auto loans (+11.5% YoY) and credit card/personal loans (+10.9%) remaining key drivers.

• Asset quality continues to be the bright spot, reflected by notably lower loan loss provisions (-74.1% YoY, -68.1% QoQ) this current quarter. Credit cost is significantly lower at 0.4% (2QFY23: 1.8%) as a result. Non-performing loan (NPL) coverage ratio is higher at 267.1% (2QFY23: 261.9%), with positive improvements seen in most matrices (ie. special mentions and restructured loans). Management has lowered its credit cost guidance for 2023 to between 1.1% and 1.2%.

Source: PublicInvest Research - 30 Oct 2023