HLBank Research Highlights

FGV Holdings - Surprised by Smaller Opex & Provisions

Publish date: Thu, 01 Dec 2022, 12:09 PM
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This blog publishes research reports from Hong Leong Investment Bank

CIMB’s 3Q22 core net profit was up 16% YoY, given robust total income growth and lower loan loss allowances. Also, NIM expanded sequentially, loans gained traction, and GIL inched down. Overall, results came ahead of expectations and hence, we raise FY22-24 forecasts by 4-6%. 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 RM5.85 (from RM5.80), based on 0.92x FY23 P/B.

Beat estimates. Stripping away transformational costs, intangible asset write off and accelerated amortization, along with goodwill impairment for its Thai business, CIMB posted 3Q22 core earnings of RM1.4bn (+7% QoQ, +16% YoY), which brought 9M22 total to RM4.2bn (+10% YoY). This beat our estimates, making up 81% of forecast but broadly in line with consensus at 78%; key variance came from lower-than-expected opex and loan loss provision.

Dividend. None declared as CIMB only divvy in 2Q and 4Q.

QoQ. Core earnings rose 7%, thanks to positive Jaws (total income grew 3% but opex decreased 1%) and lower effective tax rate (-3ppt). That said, it was capped by higher impaired loan provision (+7%) and weak non-interest income (NOII, -14% due to tepid fees and treasury showing). However, we saw net interest margin (NIM) widened 8bp.

YoY. Robust total income growth (+13%) and lower allowance for bad loans (-8%) led to a 16% rise in core bottom-line. However, the higher effective tax rate (+9ppt) limited earnings from growing at a faster rate.

YTD. Similarly, the 10% jump in core profit was driven by the 5% spike in total income and lower loan loss allowances (-35%). Again, the elevated effective tax rate (+8ppt) restricted bottom-line from expanding at a quicker clip.

Other key trends. Loans growth gained momentum to +9.0% YoY (2Q22: +6.8%) but deposits slowed to +1.0% YoY (2Q22: +4.6%). In turn, loan-to-deposit ratio (LDR) was up 2ppt sequentially to 93%. Separately, for asset quality, gross impaired loans (GIL) ratio improved 6bp QoQ to 3.49% due to a larger loan base.

Outlook. We see smaller sequential NIM expansion given: (i) bulk of the FD typically will be repriced 6-9 months from the first OPR hike (kick-started in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, loans growth is expected to chug along for now. Separately, GIL ratio is likely to rise but we are not overly worried, since CIMB has already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Moreover, FY22-23 NCC assumption built in by both us and consensus remained fairly elevated (above the normalized run rate but below FY20-21’s level).

Forecast. Following the earnings beat, we raise FY22-24 estimates by 4-6% to reflect lower opex and loan loss provision.

Retain HOLD call but with a higher GGM-TP of RM5.85 (from RM5.80), following the upward revision in profit. The TP is based on 0.92x FY23 P/B (unchanged) with the assumptions of 9.4% ROE, 9.9% 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 that its ROE generation is similar to pre-pandemic level and industry average. Overall, we are still not bullish on CIMB as we find it has a balanced risk-reward profile and share price has performed strongly over the past 5 months. Also, sector tailwinds are dissipating and investment fatigue is building up towards the banking sector, hence, limiting price performance.


Source: Hong Leong Investment Bank Research - 1 Dec 2022

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