CIMB’s 2Q22 core net profit was up 4% YoY, given robust total income growth and lower bad loan provision. Also, NIM widened sequentially and loans growth gained traction. However, GIL ratio saw an uptick. Overall, results came ahead of expectations and hence, we raise FY22-24 forecasts by 1-6%. We are still not bullish on CIMB as we find it has a balanced risk-reward profile. Retain HOLD but with higher GGM-TP of RM5.80 (from RM5.65), based on 0.92x FY23 P/B.

Beat expectations. Stripping away transformational costs along with intangible asset write off and accelerated amortization, CIMB posted 2Q22 core earnings of RM1.3bn (-10% QoQ, +4% YoY), bringing 1H22 sum to RM2.8bn (+7% YoY). This was ahead of estimates, forming 55-57% of our and consensus full-year forecasts; key variance came from lower-than-expected loan loss provision.

Dividend. Proposed 1st interim DPS of 13.0sen (2Q21: 10.44sen). Ex-date TBD later.

QoQ. Core earnings fell 10%, no thanks to higher provision for bad loans (+59%) and effective tax rate (+9ppt). That said, this was cushioned by positive Jaws (total income growth outpaced opex by 2ppt), given net interest margin (NIM) and loans expansion of 2bp and 2.5% respectively. Also, non-interest income (NOII) was up 4% from better fees and treasury performance.

YoY. Robust total income growth (+4%) coupled with lower impaired loan allowances (-30%) led to a 4% rise in core bottom-line. However, this was capped by the higher effective tax rate (+7ppt).

YTD. Similarly, the 7% jump in core profit was driven by the 1% uptick in total income and lower provision for impaired loans (-46%). Again, the elevated effective tax rate (+13ppt) limits earnings from growing at a faster rate.

Other key trends. Loans growth gained momentum to +6.8% YoY (1Q22: +5.0%) but deposits stayed steady at +4.6% YoY (1Q22: +6.4%). That said, loan-to-deposit ratio was up 2ppt sequentially to 91%. As for asset quality, gross impaired loans (GIL) ratio rose 11bp QoQ to 3.55% due larger NPL formation at its retail portfolio.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by downward CASA mix normalization. That said, loans growth is expected to chug along for now, considering economic recovery is strong. Separately, GIL ratio is likely to rise further but we are not overly concerned, since CIMB has already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Moreover, FY22-23 NCC assumptions built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Following the earnings beat, we raise FY22-24 estimates by 1-6% to reflect lower loan loss provision.

Retain HOLD but with higher GGM-TP of RM5.80 (from RM5.65), after raising our profit forecast. The TP is based on 0.92x FY23 P/B (from 0.90x) with the assumptions of 9.0% ROE (from 8.9%), 9.5% COE, and 3% LTG. This is largely in line to its 5-year and sector mean of 0.87-0.92x; we feel the valuation is fair given its ROE generation is similar to pre-pandemic level and industry average. Despite the earnings beat, we are still not bullish on the stock as we find that it has a balanced risk-reward profile. We note 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. Moreover, share price has already performed strongly over the past 2 months.

Source: Hong Leong Investment Bank Research - 1 Sept 2022