We maintain our OP call and GGM-derived PBV of 0.88x. That said, we raise our TP to RM6.35 (from RM6.05) as we accord a 5% premium from our newly ascribed 4-star ESG rating post-updates on CIMB’s strong headway into sustainability efforts. Notably, the group is stretching its green financing targets having exceeded its original goals. Meanwhile, the group’s regional operations are cushioning earnings pressure arising from unfavourable NOII performance.

CIMB recently hosted its Cooler Earth Sustainability Summit 2022 and ESG Corporate Day where it invited speakers from various industries to promote greater awareness in sustainability agendas. Pertaining to the group’s sustainability efforts, key takeaways are as follows:

- Doubling down on green financing. Thanks to significant progress in driving sustainable finance offerings, the group has met its FY24 target of RM30b in June 2022. Keeping the same timeline, the group is optimistic in stretching its target to RM60b. Based on the group’s 2QCY22 gross loans book of RM396b, this would make up a commendable 15% proportion. While this is expected to comprise mostly retail and corporate loans, we opine that the group’s regional footprint is one of the key enablers in promoting sustainable trade financing products.

- Climate targets to broaden. In addition to phasing out coal-related financing by 2040, the group is extending into the sectoral decarbonisation of cement-related accounts. Cement is identified as the second largest manufacturing emitter of greenhouse gases, given its heavy usage in construction and lack of alternatives. Although it does not make up as significant a proportion as coal financing (i.e. 0.3% of gross loans), the group seeks to partner with its cement customers to achieve a reduction of sector emission intensity by 36% by 2030.

- Building up better practices for other sectors. The group is mulling over introducing climate targets to other sectors, which we reckon would improve its C1 and C2 “climate-supporting” loans mix, which is estimated to be fairly small at this juncture. As part of its climate action plan, the group aims to balance between building on its exclusion list to reduce exposure and progressively increasing its portfolio in carbon negative assets and net zero clients. However, we anticipate this space will only become more competitive as peers also seek to build their green financing book with quality clienteles, which we do not discount could lead to the compressing of rates to incentivise onboarding.

Post updates, we leave our FY22F/FY23F assumptions unchanged. Although the group raised its sustainable financing targets, we believe it is a part and parcel of its overall loans growth strategies, hence we maintain our inputs.

Maintain OUTPERFORM with a higher TP of RM6.35 (from RM6.05, previously). We review our ESG rating for CIMB and mark higher merits from the recent updates during its sustainability roadshow, granting a 5% premium on an improved 4-star rating. That said, our GGM-derived PBV of 0.88x (COE: 11.7%, TG: 2.0%, ROE: 10.5%) is maintained. Fundamentally, the stock is supported by its regional diversification, especially in terms of NOII which most of its peers lack. CIMB’s return to double-digit ROE could be indicative of its prospects, led by better forward earnings growth (26% vs. industry average of 20%) while offering attractive dividend yields (6%) in the medium-term.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 23 Sept 2022