We maintain our GGM-derived PBV TP of RM6.00 (COE: 11.7%, TG: 3.5%, ROE: 10.5%) and OP call. The group is expected to continue its resilient showing thanks to some easing in funding costs, albeit with pressures from non-interest income. Despite concerns of possible depression in asset quality, the group opines that they are expected and highly manageable thanks to already prudent practices in place. Our assumptions are unchanged post-briefing. CIMB is one of our 3QCY23 top picks.

CIMB hosted a sell-side 2QFY23 pre-results briefing yesterday. Key takeaways are as follows:

1. CIMB Thai sees credit cost normalisation. CIMB Thai’s recent earnings report reflected a 35% YoY decline in earnings. The group highlighted that the prior year’s performance was uplifted by writebacks which were now absent. That said, 2HFY23 could see normalisation as macro pressures ease.

2. Asset quality signals not concerning. The group opines that the abovementioned would apply to all regional markets as well. With regards to gross impaired loans (GIL), there may be subsequent additions on wider encompassing inflation but this would already be well provided for by the group, with total provisions expected to be

3. Interest income to gradually improve. Net interest margins may be due for a recovery as deposit markets normalise from the aggressive competition stirred by the four OPR hikes in FY22 in Malaysia. This is expected to improve the spread between asset yields and funding costs which could support net interest margins (NIMs). However, this may be undermined by prolonged deposits maturity in its Singapore portfolio which are now only experiencing meaningful repricing. The group maintains its 5-10 bps NIMs compression guidance for now.

4. Non-interest components not so much. As investment markets soften no thanks to heightened US Fed rates with still present inflationary concerns, trading and forex performances are expected to waver in 2QFY23. There could be some support seen from recoveries in fee-based streams but it may be insufficient to offset the abovementioned weakness. On another note, the group reckoned that challenges seen for Touch N Go as a result of the liberalisation of toll payments is not material to group earnings, as its key merit is its data propositions.

Forecast. Post-update, we maintain our FY23F/FY24F numbers.

Maintain OUTPERFORM and TP of RM6.00, based on an unchanged GGM-derived PBV of 0.86x (COE: 11.7%, TG: 3.5%, ROE: 10.5%). We also apply a 5% premium based on CIMB’s 4-star ESG ranking thanks to headways in green financing. CIMB is expected to be the leading bank in terms of sequential earnings growth, ranging at double-digit growth rates. Notably, among the large-cap banks, CIMB has the highest management overlay in proportion to earnings in the near term. Should we position for significant overlay writebacks to occur in CY23, the possible translation to special dividends could add up to c.4% yield on top of its existing payout. CIMB is one of our 3QCY23 top picks.

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

Source: Kenanga Research - 26 Jul 2023