CIMB’s 1Q22 core earnings rose 82% QoQ, given lower loan loss provision and positive Jaws. Also, NIM expanded sequentially, loans growth gained traction, and GIL ratio improved. Overall, results were largely within estimate and hence, forecasts were unchanged. We are not yet turning bullish, despite share price weakness given that CIMB has one of the highest investment % concentration in HFT securities with negative FVOCI. Besides, the recent fiasco surrounding its duplicate credit transactions does not help market sentiment. Maintain HOLD and GGM-TP of RM5.65, based on 0.90x FY23 P/B.

Broadly within. Stripping deconsolidation of Touch ‘n Go Digital (in 1Q21), intangible asset write-offs (in 1Q22 & 4Q21), loss of dilution interest on associate disposal (in 4Q21), and prosperity tax deferred tax asset (in 4Q21), CIMB chalked in 1Q22 core net profit of RM1.5bn (+82% QoQ, +10% YoY). This was largely within expectations, making up 29-30% of our and consensus full-year forecasts.

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core earnings increased 82%, thanks to lower loan loss provision (-60%) and positive Jaws (total income +3% vs opex -7%), which more than compensate for the higher effective tax rate (+18ppt). During the quarter, we observed net interest margin (NIM) expanded 4bp while non-interest income (NOII) increased 12% due to stronger investment-related gains. Also, the decline in opex was aided by lower marketing and admin costs.

YoY. The lower allowance for impaired loans (-60%) led to a 10% increase in core net profit. However, this was capped by higher effective tax rate (+13ppt) along with weak total income (-1%) as NIM compressed 7bp and NOII fell 11% (due to lower fees and investment-related gains).

Other key trends. Loans growth gained momentum to +5.0% YoY (4Q21: +3.3%) but deposits stayed steady at +6.4% YoY (4Q21: +6.7%). That said, loan-to-deposit ratio was up 2ppt sequentially to 89%. As for asset quality, gross impaired loans (GIL) ratio improved 8bp QoQ to 3.44% due smaller NPL formation and larger loan base.

Outlook. NIM is seen to expand sequentially, following May-22’s OPR hike. However, the magnitude could be capped by downward normalization of CASA mix. That said, loans growth is expected to chug along for now, considering economic recovery. On a separate note, GIL ratio is likely to creep up but we are not overly concerned as CIMB has already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Moreover, FY22 NCC assumption pencilled in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Unchanged since 1Q22 results were largely in line.

Retain HOLD and GGM-TP of RM5.65, based on 0.90x FY23 P/B with assumptions of 8.9% ROE, 9.5% COE, and 3.0% LTG. This is largely in line to its 5-year and sector mean of 0.89-0.92x; we feel the valuation is warranted given its ROE output is similar to pre-pandemic level and industry average. Despite its recent share price weakness, we are not yet turning bullish, considering CIMB has one of the highest investment % concentration in HFT securities, making its P&L sensitive to MGS yield movement and the negative FVOCI reserve is unlikely to provide meaningful respite. Also, the recent fiasco surrounding its duplicate credit transactions does not help market sentiment.

Source: Hong Leong Investment Bank Research - 1 Jun 2022