KUALA LUMPUR (Sept 18): Despite trading at the highest price-book (PB) ratio in the past 10 years, analysts are still bullish about CIMB Group Holdings Bhd's (KL:CIMB) propects, as they see the counter scaling greater heights.

This is because of improved earnings outlook for the third largest banking group in Malaysia, particularly better interest margins due to lower cost of funds, as well as better non-interest income outlook for its investment banking division.

CIMB’s declining cost-to-income ratio has also contributed to analysts remaining bullish on the bank.

Out of the twenty analysts that covered the stock, 14 had “buy” ratings while the other six called for a “hold”. JPMorgan is the latest foreign broker that has upgraded CIMB’s rating to “overweight” from “hold”, with its target price raised to RM10 from RM8.

The average target price among the 20 analysts is RM8.89.

JPMorgan said the re-rating was mostly due to CIMB’s emphasis on sustainable return-on-equity (ROE) delivery through focus on costs management such as cost of funds, operating expenses and provisions, in addition to its top-line growth.

“Key strategies include prioritising deposit collection over loans, broadening fee collection, re-architecting processes to reduce costs and reallocating capital towards higher return on risk-weighted assets in terms of geographies and businesses,” JPMorgan wrote in a published note.

“These shifts, on top of ongoing structural reforms in Malaysia, set up the bank to deliver 11 to 13% ROE, higher than street forecasts and 12% to 18% earnings per share (EPS) growth in next three years, leading to a re-rating,” it said.

Year to date, as of Wednesday’s closing price of RM8.33, CIMB has generated returns of 53.2% — inclusive of dividends — becoming the best performing banking stock and FTSE Bursa Malaysia KLCI component member.

The banking group is currently trading at a PB value of 1.29 times, the highest level in 10 years since July 2013. The bank’s current market capitalisation of RM89.22 billion is near its all-time high of RM90.87 billion reached last Tuesday.

A foreign fund darling

It is worth noting that CIMB’s PB ratio first reached above one time on March 15, 2024, at a period when the Malaysian stock market saw strong foreign inflows that had started in November 2023, before these inflows momentarily hit a blip.

The rise in CIMB’s share price as well as its PB valuation has been fuelled by a return of foreign interests to the counter, with its foreign shareholding soaring to 33.2% — the highest among all banks.

A cursory check on foreign shareholdings of the six largest banks showed that CIMB’s foreign ownership change since December 2020 was the most positive at 12.3%, followed by AMMB Holdings Bhd (KL:AMBANK) at 5.5% and Malayan Banking Bhd (KL:MAYBANK) at 3.5%.

Since 2010, CIMB’s PB valuation has shown a high correlation to its foreign shareholdings. The bank’s PB ratio hit a high of 1.57 in June 2011 when foreign ownership was highest at 42.9%, while its PB ratio hit a low of 0.43 times when foreign funds only owned 20.6% of the stock.

CIMB’s current PB ratio of 1.29 times is still considerably lower than the 1.57 times reached in June 2011. At the same time, its foreign shareholding level of 33.2% is still considerably lower than the 42.9% level recorded in June 2011.

Nevertheless, the rise in CIMB’s share price has also spooked Kenanga Research.

The investment bank-backed research house downgraded CIMB to “market perform” on September 2, from “outperform”, saying the rally could be overdone at current price points, as CIMB had already met its ROE target of 11.5% for FY2024.

Kenanga also said based on cost of equity assumption of 11.2%, and pegging to 12.5% return on equity (ROE) which is at a high range of CIMB’s targets, a target price of RM8.60 would be derived using the Gordon Growth Model of 1.05 PB ratio of FY2025.

Other analysts cited the potential for slower near-term non-interest income growth off a high base and fewer large scale structural cost takeout opportunities as some of the downside risk to CIMB’s rich valuation.

These downside risks were also noted by JPMorgan — weaker than expected loan growth, weaker net-interest margin due to more intense competition, potential asset quality issues, especially in the small and medium-sized enterprises space, as well as strategy execution risks.

However, since FY2022, CIMB has managed to deliver a ROE of more than 10%, a metric last seen in FY2013.

The bank was also able to reign in its cost to income ratio to below 50%, and trending downwards. CIMB’s net profit reached a record high of RM6.98 billion in FY2023, for a 28.3% year-on-year growth, enabling the bank to pay out two special dividends.