Management’s tone was cautious but retained its FY22 guidance. In upcoming quarterly results, we are likely to see NIM widening, robust loans growth, uptick in NOII, and resilient asset quality. Separately, Niaga reported its 2Q22 results, where core profit here rose 14% YoY, thanks to positive Jaws. This came in line with estimates. Thus, our forecasts were kept as underlying operational trends at the group level were also performing according to expectations. Overall, we are not yet turning bullish, despite price weakness given that CIMB has one of the highest investment % concentration in HFT securities with negative FVOCI. Maintain HOLD and GGM-TP of RM5.65, based on 0.90x FY23 P/B.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 2Q22. Separately, Niaga also reported its 2Q22 results. We summarize the key-takeaways in this report.

60-70bp FY22 NCC guidance intact. The group’s level take-up rate for loans under Rescheduling and Restructuring (R&R) program has improved slightly to 4% from 5% in Apr-22 while the missed payment trend was generally benign. Also, asset quality remains resilient in 2Q22 but management cautioned that it may meaningfully weaken towards end-2022 or next year. As such, they intend to maintain as much pre-emptive provisions as possible instead of running it down, given macro headwinds. In addition, there will be macroeconomic variable (MEV) provisioning top-up in 2Q22 but will be offset by some consumption of management overlay at its business banking segment.

Sturdy 2Q22 top-line showing. Sequential NIM should expand, thanks to May-22’s OPR hike. Besides, local cost of funds (COF) held fairly steady due to rational deposit competition (only seen more activities in the longer duration bucket of 12-18 months). However, S’pore faced COF pressure from aggressive FD pricing and savings attrition to FD. Separately, 2Q22 loans growth momentum was robust and the slowdown effect from OPR increases has not surface. As for NOII, we are likely to observe some QoQ uptick, coming from fees and loan recoveries (at Indo). However, trading and FX were weak and IB pipeline was thin.

Other findings. In its bi-annual stress test, CIMB finds that it has sufficient capital and provision to navigate through a period of recession and severe rate hikes. Moreover, management shared outcome of this exercise is not as bad, vis-à-vis to the trough of Covid-19 pandemic. As for the issue of double crediting of customers, CIMB has fully provided for this and is still trying to recoup its losses. On cost front, we gathered it is within the low single digit growth trajectory for FY22. Lastly, management is looking to lower the electable portion of its dividends since the worst of Covid-19 is behind them.

Niaga 2Q22 results review. Excluding one-time intangible and fixed assets write off in 2Q21, CIMB Niaga (93%-owned) posted 2Q22 core earnings of IDR1,340bn (+12% QoQ, +14% YoY), bringing 1H22 sum to IDR2,534bn (+17% YoY). This was broadly within expectations, making up 54-56% of our and consensus full-year estimates. The 12% QoQ rise in core profit was thanks primarily to lower loan loss provision (-16%). While NIM widened 17bp sequentially, it was offset by a 9% fall in NOII as trading and FX gains were weak. On a YoY basis, core net profit rose 14% given positive Jaws from robust total income (+7%, from stronger FX & derivative gains along with higher recoveries). YTD, the 17% spike in core bottom-line was led by better NOII (+22%) and lower bad loan allowances. (-3%). Besides, loans growth gained traction to +9.4% YoY (1Q22: +5.3%) but deposits grew at a slower clip of +6.4% YoY (1Q22: +18.6%). As for asset quality, gross impaired loans (GIL) ratio improved 25bp QoQ to 6.5%.

Forecast. Unchanged since underlying operational trends in 2Q22 were performing according to expectations. Moreover, Niaga’s 2Q22 results was within estimates. The group aims to release its quarterly results on 30th Aug.

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 0.88-0.92x; 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.

Source: Hong Leong Investment Bank Research - 28 Jul 2022