We maintain our GGM-derived PBV TP of RM6.55 (COE: 11.0%, TG: 3.0%, ROE: 10.5%) and OP call. Greater net interest margin (NIM) pressures are likely to materialise as higher interest deposits kick in. However, this should dissipate over time as a reflection of a stable OPR. Loans acquisitions continue to favour quality over quantity while trading and forex performances should improve on more favourable macro conditions. Meanwhile, CIMB Niaga’s (Niaga) 1QFY23 results were in line with estimates.

CIMB hosted a sell-side 1QFY23 pre-results briefing yesterday. Key takeaways are as follows:

1. NIM stresses could peak. Owing to heightened competition of deposits on the OPR’s gradual rise in 2022, a sharp rise in funding cost is expected to materialise and the group anticipates a greater impact in 1HFY23. That said, the market may be showing some concerted need to lower product rates on the back of a more stable outlook for the OPR. While there is no change to the group’s guidance of 5-10 bps compression, an unexpected prolonging could lead to more downside bias to NIM projections.

2. Loan growth to be quality driven. The group seeks to maintain its 5-6% loan growth target but indicates that it will not compromise asset quality for market share. At present, the group has little concentration in “riskier” sectors such as construction (3% of total loans) and commercial properties (8%).

3. Working to shave off non-performing loans (NPL). On top of the above effort to clean up its asset quality readings, the group seeks to further monetise its existing NPL inventory on accounts that we suspect may have early indication of extended stress. The group opines that it could build a recurring income stream from such transactions, possibly indicating lower tolerance for delinquencies going forward.

4. Stronger hopes for non-interest income (NOII). The group remains optimistic that NOIIs could deliver double-digit growth as investor sentiment returns in its key operating regions which could boost trading and forex gains. This is reflective of a recovery from FY22’s poorer performances no thanks to global conflicts, supply chain disruptions and rising interest rates which sidelined participation.

Meanwhile, 92.5%-owned Niaga’s 1QFY23 earnings came in within expectations with a reported 1QFY23 earnings of IDR1.58t, making up 30% of consensus full-year estimate. Though the group is optimistic in its near-term outlook, it sought to be conservative with its overall FY23 performance, suggesting moderation in subsequent quarters (refer to the overleaf for further commentary on its results).

We maintain our OUTPERFORM call, forecasts and TP of RM6.40 based on an unchanged GGM-derived PBV of 0.94x (COE: 11.0%, TG: 3.0%, ROE: 10.5%). We also apply a 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 (15% vs. industry average of 4%) while offering attractive dividend yields (c.6-7%) in the medium term.

Source: Kenanga Research - 28 Apr 2023