CIMB Thai’s 3Q22 earnings declined 8% YoY, no thanks to (i) negative Jaws, (ii) uptick in impaired loan allowances, and (iii) higher effective tax rate. Also, NIM compressed sequentially and asset quality weakened. That said, loans growth gained traction. Overall, results were within estimates and thus, forecasts were unchanged. We are still not bullish on CIMB as we find it has a balanced risk reward profile. Although it has the 2nd highest pre-emptive provision to loans, it has to contend with the large % investment mix in HFT securities. Retain HOLD and GGM-TP of RM5.80, based on 0.92x FY23 P/B.

In line. CIMB Thai (95%-owned) chalked in 3Q22 net profit of THB696m (-34% QoQ, -8% YoY), bringing 9M22’s total to THB2.8bn (+65% YoY). This was within estimates, accounting for 71-77% of both our and consensus full-year forecasts; its contribution to overall group’s PBT is minimal at less than 10%.

QoQ. Net profit declined 34%, no thanks to higher loan loss provision (doubled). Also, top-line growth was muted (-1%) given the 6% drop in non-interest income (NOII), led by weak fees and other operating income. Besides, it was dragged further by the net interest margin (NIM) contraction of 30bp.

YoY. The 8% decrease in bottom-line came on the back of: (i) negative Jaws (flat total income growth vs 1% rise in opex), (ii) uptick in impaired loan allowances (+1%), and (iii) higher effective tax rate (+5ppt).

YTD. Positive Jaws from lower opex (-6%) together with the decline in impaired loans provision (-45%) have helped profit to increase 65%. However, there was again some drag at the top (-2%), owing to NIM compression (-40bp).

Other key trends. Net loans growth accelerated further to +4.2% YoY (2Q22: +2.3%) but deposits slowed to +7.3% YoY (2Q22: +12.9%). As such, net loan-to-deposit ratio ticked up 1ppt sequentially to 103%. On the other hand, asset quality softened a little, seeing gross NPL ratio climbing 10bp QoQ to 3.4%.

Outlook. In our view, recent rate hikes would not greatly benefit CIMB Thai given its strategy to focus more on expanding its lower-yielding but safer assets; hence, NIM improvement may be capped. That said, loans growth is seen to climb further from the rebound in tourism activities and domestic demand. As for asset quality, we are not particularly worried, considering that CIMB Thai has already made heavy pre-emptive provisions in FY20-21 to cushion for any spikes in gross NPL ratio.

Forecast. Unchanged as CIMB Thai’s 3Q22 results were within expectation.

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 0.87-0.90x; we feel the valuation is fair given its ROE generation is similar to pre-pandemic level and industry average. Overall, we are still not bullish on the stock as we find it has a balanced risk-reward profile and share price has already performed strongly over the past 4 months. We note CIMB has the second highest pre-emptive provision to loans, which provide respectable cushioning to any potential asset quality softness but has to cope with the large % investment concentration in HFT securities, which makes its P&L sensitive to MGS yield movement.

Source: Hong Leong Investment Bank Research - 25 Oct 2022