We applaud CIMB for the strong progress on its sustainable commitments (met 22-100% of 2024-2030 targets, despite only being in 2022). Hence, we reckon the bank will make further strides in posting better grades in our next ESG banking review. Overall, our forecasts were kept and we are still not bullish on CIMB as we find that it has a balanced risk-reward profile. Even though it has the second highest pre-emptive allowances to loans (provide good cushioning to any asset quality weakness), it has to contend with the large % investment concentration in HFT securities (makes its P&L sensitive to MGS yield movement). Maintain HOLD and GGM-TP of RM5.80, based on 0.92x FY23 P/B.

Yesterday, CIMB updated the investment fraternity on its sustainability commitments, progress and efforts. We summarize the key-takeaways in this report.

Ahead of its 2024 sustainability commitments: (i) mobilize RM30bn in sustainable finance (Jun-22: RM30bn, 100% met, hence, raised target to RM60bn); (ii) RM150m CSR investment over 5 years and 100k hours p.a. in staff volunteer activities (Dec-21: RM36m/67k hours, 24%/67% met); (iii) achieve net zero operational greenhouse gas (GHG) scope 1 and 2 emissions by 2030 (Jun-22: 22% lower against 2019 baseline) and net zero GHG scope 3 by 2050 (set interim climate targets for coal and cement sectors); (iv) no financing of new coal and exit by 2040, along with no deforestation, no new peat and no exploitation (NDPE) stance starting mid-2022 (rolled out in M’sia, S’pore and Thai by end-2022 while Indo by end-2023).

Pathway to reduce carbon emissions. In order to reach net zero operational GHG emissions (vs 2019 baseline), by 2030, management will employ three key levers: (i) long-term business changes; (ii) avoid & cut energy consumption; (iii) green energy & renewable energy certificates. Collectively, these are expected to offset scope 1 and 2 emissions by 93% (17%/8%,69% from lever 1,2,3 respectively) while the balance 7% is derived from carbon offset projects. At present, CIMB’s scope 2 GHG is 20x larger than scope 1, while its scope 3 GHG is estimated at 120x of scope 1 and 2 combined. Besides, we note that CIMB has established an internal carbon price of RM70/tonne of GHG emissions and will progressively increase to RM335/tonne of GHG emissions; this acts as a fee charge to various business units and funds raised at the group level will be used for ‘green’ capex.

Risk management. At Jun-22, despite only 6.9% of its loan exposure was tagged as high sustainability risk sectors, the coverage of financed emissions stood significantly higher at 35% of its gross loans portfolio. Given the high concentration mix, CIMB will take proactive steps to curb tail events, such as client engagement, run quantitative analysis on transition & physical risks, perform scenario analysis and stress tests .

Forecast. Unchanged since there were no material positive/negative updates.

Retain HOLD and GGM-TP of RM5.80, based on 0.92x FY23 P/B with assumptions of 9.0% ROE, 9.5% COE, and 3.0% LTG. This is largely in line to its 5-year and sector mean of 0.87-0.89x; we feel the valuation is fair given its ROE output is similar to pre pandemic level and industry average. Overall, we like CIMB’s sustainability initiatives and we reckon that it will make further strides in posting better grades in our next ESG banking review. However, share price has already performed strongly over the past 3 months, and thus, we are still not bullish on the stock as we find that it has a balanced risk-reward profile. We note CIMB has the second highest pre-emptive allowances to loans, which provide good cushioning to any potential asset quality weakness but has to contend with the large % investment concentration in HFT securities, which makes its P&L sensitive to MGS yield movement.

Source: Hong Leong Investment Bank Research - 23 Sept 2022