Management’s tone was cautiously optimistic and FY22 guidance were kept. As such, our forecasts were unchanged as underlying operational trends in 3Q22 are performing to expectations. In the upcoming quarterly results, we will likely see NIM expansion and steady loans growth on sequential basis. However, soft NOII and higher NCC would limit financial performance. Overall, we still find that CIMB 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.

Yesterday, CIMB held a pre-closed period conference call. Discussions were around its broad operational trends in 3Q22. We summarize the key-takeaways in this report.

Maintained 50-60bp FY22 NCC guidance. The % of loans under Rescheduling and Restructuring (R&R) program remained the same vs Jul-22’s level at 3% and also the missed payment pattern (for those who have graduated) was unchanged at 6%. That said, delinquencies have picked up in Jul-Sep 2022 but was well within management’s expectations. In 3Q22, we see more allowances for its commercial books and some top-up for a legacy name in Indo. As for 4Q22, there could be additional conservative macroeconomic variable (MEV) and management overlay provisions. We understand CIMB’s intention is to sustain its stock of pre-emptive allowances into 2023.

3Q22 to eke out some growth. Despite rising rivalry for deposits and CASA attrition, NIM is seen to widen sequentially given recent interest rate hikes and improvement in Indo. CIMB anticipates another 25bp/50bp OPR increase this week/later part of 1H23. Separately, conversation on loans growth were limited but looking at recent domestic banking system credit expansion along with CIMB Niaga and Thai’s performance, we expect it to chug along nicely this quarter. As for NOII, lumpy loan recoveries and NPL sales from its regional operations did not reoccur in 3Q22 and fee income was softer. That said, trading and forex performance was stable QoQ.

Other findings. Although there is brewing economic headwinds, CIMB is confident in achieving its Forward 23+ targets (see our report dated 19 Oct-20, titled ‘Recalibrated strategic plan’) given: (i) its portfolio reallocation is bearing fruit in lowering credit cost, (ii) large pre-emptive provisions, and (iii) successful cost take-out. Also, interest rate hikes and economic slowdown would not materially drive-up delinquencies based on their credit analysis but this warrants a relook if a deep recession occurs. On the other hand, market volatility is still hurting its mark-to-market reserves in 3Q22, however the delta is much lesser than a quarter ago; the historical 50% dividend payout capacity is not affected and CIMB strives to continue cutting the electable portion of its dividends. Lastly, on cost front, the low single digit growth trajectory guided for FY22 is intact.

Forecast. Unchanged since there were no material updates from the briefing. Also, underlying operational trends in 3Q22 are performing according to expectations.

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 - 1 Nov 2022