We maintain our GGM-derived PBV TP of RM6.40 (COE: 11.0%, TG: 3.0%, ROE: 10.5%) and OP call. The industry could face hindrances to interest income as on top of heightening competition for funds, the maturity of past termed deposit products could further drag funding costs on renewal. Still, this is widely expected in reflection of rising rates, which could also hamper asset quality. CIMB’s position is at least secured by better-than-peer readings of its non-interest income (NOII). CIMB is one of our 1QCY23 Top Picks.

CIMB hosted a sell-side 4QFY22 pre-results briefing yesterday. Key takeaways are as follows:

- Maturing termed deposits to weigh down interest margins. The group hinted of continual intensity in price competition of deposits, but this was widely anticipated given Nov 2022 experiencing another OPR hike. However, owing to maturing long-term deposits, a refresh of now higher interest rates will likely cause a more noticeable dent in margins as compared to prior quarters. Regionally, the impact of this is thought to be in tandem to the size of respective operations, being Malaysia seeing the largest offset, followed by Indonesia, Singapore and Thailand. This could normalise in FY23 should interest rates stabilise.

- Allowance for higher provisions in 4QFY22. During its 3QFY22 earnings presentation, the group maintained its 50-60 bps credit cost guidance for FY22. This indicates room for additional provisions ahead of its 9MFY22 annualised credit cost of 43 bps. The group has now identified the need for further overlays with specific allocation to non-retail accounts and legacy portfolios in the Indonesian steel industry. Our assumptions reflect a possible net charge of >RM700.0m in 4QFY22 (3QFY22: RM478m) to achieve this, amounting to >RM2.0b in total FY22 net provisions. Still, this is an improvement from FY21’s RM2.61b net impairment.

- NOII streams to rejuvenate. Banks saw a lull here due to poor sentiment dragging investment trading and forex exposures. The group anticipates stronger performance in 4QFY22 as macros were supportive of higher fee income and trading activities. That said, CIMB was one of the better performing banks in NOII, thanks to lumpier portfolio recoveries reported throughout FY22.

Forecasts. Post updates, we leave our FY22F/FY23F assumptions unchanged. We note that our credit cost assumptions are highly conservative at 63 bps (against 50-60 bps guidance) to buffer against possible surprises as asset quality outlook is highly uncertain, particularly during the ongoing interest rate upcycle.

Maintain OUTPERFORM and TP of RM6.40. Our TP is based on an unchanged GGM-derived PBV of 0.88x (COE: 11.0%, TG: 3.0%, ROE: 10.5%) with an applied 5% premium granted by CIMB’s 4-star ESG ranking thanks to headways in green financing. 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 (27% vs. industry average of 23%) while offering attractive dividend yields (6%) in the medium-term. CIMB is one of our 1QCY23 Top Picks.

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 - 27 Jan 2023