CIMB Niaga’s 1HFY23 net profit was stronger-than-expected as it continued to sustain growth in both fund and fee-based income streams. The encouraging performance led the group to improve its targets, confident that it is fundamentally well equipped to hold its market position and outshine its peers. We maintain our forecasts, GGM-derived TP of RM6.00 and OUTPERFORM call for CIMB. The stock is one of our 3QCY23 top picks.

1HFY23 above expectations. Its 91.5%-owned CIMB Niaga (Niaga) reported 1HFY23 earnings of IDR3.23t was better-than-expected, making up 57% of consensus’ full-year estimates. The positive deviation could be due the combination of sustained loan growth, stable interest margin performance as well as lower credit cost requirements.

YoY, 1HFY23 net interest income (+5%) saw support from both a stronger loan book (+5%) and margin expansion (4.69%, +12 bps) as deposit-stirred compression subsides. Corporate accounts remain the biggest contributor the group’s size and growth. With regards to non interest income, the 8% increase was mainly driven by higher loan recovery while fee-based income was stable. Overall cost-to-income improved to 44.0% (-1.1ppt) led mainly by the higher top line. Meanwhile, credit cost came in at 151 bps (-60 bps) as asset quality concerns ease. All in, Niaga reported a 1HFY23 net profit of IDR3.23t (+28%).

Niaga’s outlook. With 1HFY23’s strong delivery, the group is confident of upgrading its full-year targets, namely: (i) a higher ROE of 14%-16%, from 12%-14%; and (ii) lower credit cost of 150-170 bps, from 160-180 bps. Meanwhile, its loan growth target of 6%-8% and net interest margin target of 4.6%-4.8% are unchanged. While this may indicate that bottom-line performance will be carried by better provisioning needs, the group is confident that its top line will remain fundamentally steady as it continues to win market share over smaller scale competitors. Meanwhile, the normalisation of funding costs on a declining termed deposit mix would keep interest margins manageable. Meanwhile, Bank Indonesia is considering to implement the spin-off for Islamic banking units which may cause some divide between institutions. However, the group indicated that it is still assessing the situation.

Forecasts. Post-Niaga’s results, we leave our earnings forecasts for CIMB unchanged for now, pending group-level earnings results to be released end-Aug 2023.

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 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 - 1 Aug 2023