CIMB’s 4Q21 core earnings quadrupled YoY given lower bad loan allowances. Also, NIM widened 1bp sequentially and loans growth gained traction. However, GIL ratio deteriorated. Overall, results were in line but we cut FY22 earnings by 8% to factor in prosperity tax impact and lower FY23 net profit by 4% to account for higher loan loss provision. We continue to see balanced risk-reward profile for the stock. Maintain HOLD but with higher GGM-TP of RM5.65 (from RM5.40), based on 0.91x FY23 P/B.

Within estimates. After stripping off modification loss, intangible asset write-offs, loss of dilution interest on associate disposal, and prosperity tax deferred tax asset, CIMB posted 4Q21 core net profit of RM811m (-34% QoQ, +4-fold YoY), bringing FY21 total to RM4.7bn (+3-fold YoY). This was in line with expectations, making up 98% of both our and consensus full-year forecasts.

Dividend. Final DPS of 12.55sen was proposed (4Q20: 4.81sen; FY21: 22.99sen vs FY20: 4.81sen). Ex-date TBD later.

QoQ. Core earnings decreased 34%, no thanks to higher loan loss provision (+36%) and negative Jaws (opex growth outpaced total income by 5ppt). During the quarter, net interest margin (NIM) widened 1bp while non-interest income (NOII) was up 16% due to better fees and smaller forex losses.

YoY. Despite the negative Jaws arising from weak total income (-2%) vs opex growth (+6%), lower bad loan allowances (-48%) led to the quadrupling in core bottom-line.

YTD. The 3-fold spike in core net profit was driven by positive Jaws (total income rose 5% while opex grew 3%) and lower impaired loans provision (-51%)

Other key trends. Both loans and deposits growth gained momentum to +3.3% YoY (3Q21: +1.6%) and +6.7% YoY (3Q21: +5.2%) respectively. That said, loan-to-deposit ratio was up 1ppt sequentially to 87%. As for asset quality, gross impaired loans (GIL) ratio increased 14bp QoQ to 3.52% due larger NPL formation.

Outlook. We expect sequential NIM to hold steady at current levels before contracting again due to deposit rivalry. That said, this is seen to expand when BNM hikes OPR later this year. Also, loans growth is anticipated to continue pick up momentum given economic recovery. Separately, GIL ratio is likely to creep up but we are not overly worried as CIMB has already made heavy pre-emptive provisioning in FY20-21 and in our view, credit risk has been passably priced in by the market, looking at the still high NCC assumption applied for FY22 by both us and consensus (above normalized run rate but below FY20-21’s level).

Forecast. Despite the decent set of results, we cut FY22 earnings by 8% to factor in prosperity tax impact and lower FY23 net profit by 4% to account for higher loan loss provision.

Maintain HOLD but with higher GGM-TP of RM5.65 (from RM5.40), after rolling our valuations to FY23. The TP is based on 0.91x P/B (unchanged) with the assumptions of 8.9% ROE (from 8.8%), 9.5% COE, and 3.0% LTG. This is largely in line to its 5- year and sector mean of 0.90-0.92x; we feel the valuation is warranted given its ROE output is similar to pre-pandemic level and industry average. Since CIMB’s share price has performed strongly over the past 1 year, we prefer to instead buy into underappreciated, laggard, lower beta banking stocks (which have comparable recovery growth drivers) like RHB (TP: RM7.00) and Maybank (TP: RM9.40) as both of them present better risk-reward opportunities.

Source: Hong Leong Investment Bank Research - 1 Mar 2022