KUALA LUMPUR (July 26): Hong Leong Investment Bank (HLIB) Research has downgraded CIMB Group Holdings Bhd to ‘hold’, from ‘buy’ previously, on potentially stunted financial performance quarter-on-quarter (q-o-q) due to higher net credit cost (NCC).

However, HLIB maintained its Gordon growth model (GGM)-derived target price (TP) of RM5.85 based on 0.95 times the financial year 2023 (FY2023) price-to-book ratio with assumptions of 9.7% return on equity (ROE), 10.1% cost of equity capital and 3% long-term growth.

“Management sounded cautiously optimistic and core operational trends in 2Q2023 are performing to expectations,” said HLIB analyst Chan Jit Hoong after CIMB’s pre-closed period conference call, adding his FY2023-FY2025 forecasts for the banking group were unchanged.

Meanwhile, for the upcoming quarterly results, Chan said it is likely to see smaller net interest margin (NIM) slippage, improved loans and non-interest income (NOII) growth, on a sequential basis.

During the pre-closed conference call, CIMB shared that, save for Thailand, three other operating countries (Malaysia, Indonesia, Singapore) saw sequential NIM slippage in 2Q2023. Hence, NIM at the group’s level also contracted, though, at a much smaller disparity, cushioned by the overnight policy rate (OPR) hike in Malaysia earlier this May.

CIMB expects their NIM to stabilise onwards from the third quarter of this year, premised on lower deposits repricing locally, along with upward loans pricing in Indonesia and Thailand, but Singapore remaining to be sluggish.

Separately, CIMB's management shared that loans growth accelerated q-o-q and quarterly NOII continues to shine, on strong other income, foreign exchange and trading performance.

Additionally, the uptick in delinquency rate in 2QFY2023 has slightly resided, though CIMB believes it will peak in the last quarter of 2023.

Regardless, any weakening in asset quality — stemming from subsidy reforms and OPR increases — is seen to be well buffered by its elevated 94% loan loss coverage versus its pre-pandemic level of 77%. No glaring issues arose for both CIMB’s commercial property and construction segments as their respective watchlists remained relatively stable.

CIMB looks to minimise any provision overlay write-backs and lower its gross impaired loans ratio through proactive non-performing loan sale, in an attempt to maintain its limited liability company at 90%-100% (1Q2023: 94%).

As such, HLIB believes NCC will inch up since in the preceding quarter it printed only 37 basis points (bp), below CIMB’s FY2023 NCC guidance of 45-55bp.

CIMB further shared in the conference call that its investment banking business was soft overall on a quarterly basis but the pipeline looks promising in the second half of 2023.

The banking group also seeks to break into the renewable energy ecosystem with a big bang, though has mentioned that prudence and discipline will be practised when selecting clientele to prevent any future asset quality issues.

CIMB also looks to maintain its dividend payout ratio at a range of 40% to 60%.

The investment entity sees that the valuation is largely in line to CIMB’s five-year and sector mean of 0.82 to 0.91 times; HLIB feels the valuation is warranted since its ROE output is similar to pre-pandemic level and industry average.

“Following our upgrade in June, CIMB’s share price has rallied 13% and hence, we now find that the risk-reward profile of the stock to be more balance,” Chan added.

Given CIMB’s current status, HLIB said that it sees more value and opportunity in buying into laggard names like Public Bank Bhd (TP: RM4.80) and Alliance Bank Malaysia Bhd (TP: RM4.15) to generate better returns.

As the counter opened, CIMB shares were up two sen or 0.37% to RM5.45, valuing the group at RM58.12 billion.