In effort to stage a new leg of growth over the next 4 years, CIMB has fine -tuned its prior business strategies. However, the success of Forward23+ and whether FY24 financial targets can be achieved, hinge a lot on external factors. Overall, we cut FY21 earnings by 3% to factor in higher net credit cost assumption. The risk-reward is balanced as decade low foreign shareholding and undemanding valuations got defused by short-term Covid-19 headwind uncertainties. Retain HOLD but with lower GGM-TP of RM3.30, based on 0.55x FY21 P/B

Last Friday, CIMB unveiled its newly recalibrated “Forward23+” strategic plan. In this report, we examine the strategies going forward and whether its financial aspirations for FY24 are attainable.

Earlier plan. To recap, the main objective of Forward23 was to pursue growth via topline, anchoring on Malaysia and Indonesia markets (both combined to >80% of PBT). Besides, CIMB looked to increase productivity, customer experience, and sales, apart from leveraging on the foundation built by T18; these include: (i) digitization efforts, (ii) data analytics, (iii) personalized services, and (iv) establish strategic partnerships. To benchmark, management has outlined 3 financial targets for FY23 i.e. (i) raise ROE to 12-13% (1H20: 3%), (ii) bring CIR down to 45% (1H20: 55%), and (iii) maintain CET1 ratio at 13% (1H20: 12.9%).

Recalibrated strategy. In Forward23+, on top of attempting to build upon the groundworks of its predecessor, CIMB also aims to reshape its portfolio (on specific business divisions) and lower costs. In addition, management will embrace a profitability growth model instead of pursuing asset expansion aggressively. We note that financial goals committed in Forward23 were pushed back to FY24, no thanks to Covid -19 disruption. To meet the ROE target of 12-13% in FY24 (from the 2-3% guidance in FY20), bulk of the drivers are seen to come from: (i) provisions improvement (30%) and (ii) cost cut (30%), supplementing with (iii) vigorous NOII growth (20%), (iv) judicious asset growth (10%), and (v) capital management (10%).

A tall order to hit. Although we appreciate the strategies put forth by CIMB over the next 4 years, its FY24 financial aspirations are stretched, particularly CIR and ROE, in our opinion. We reckon the success of Forward23+ is more reliant on external support like vibrancy of economic activities.

• Despite cost savings of RM800m-1b by FY22, opex is still anticipated to grow by a CAGR of 2-3% (FY20-24) on the back of BAU escalation. We estimated that total income has to grow at a 4-year CAGR of 9% in order to reduce CIR to 45%; this is higher than the 3% revenue CAGR, CIMB booked from FY15-19.
• For ROE to climb to 12-13%, CIMB must grow earnings at a much rapid pace (we estimate 43-44% p.a. with 50% dividend payout and 50% reinvestment rate) or find ways to reduce its equity position; we believe both are difficult tasks.

Forecast. We cut FY21 earnings by 3% to factor in higher net credit cost assumption, amid unabating Covid-19 headwinds in both Malaysia and Indonesia.

Keep HOLD but with a lower GGM-TP of RM3.30 (from RM3.50), following our profit cut and based on 0.55x FY21 P/B (from 0.58x) with assumptions of 5.9% ROE (from 6.0%), 8.2% COE, and 3.0% LTG. This is beneath both its 5-year average of 0.92x and the sector’s 0.75x; we feel the valuation is fair given its ROE output is 3ppt below its historical and industry mean. While trading at an attractive price point, CIMB’s riskreward profile is balanced, no thanks to short-term Covid-19 headwind uncertainties.

Source: Hong Leong Investment Bank Research - 19 Oct 2020