We maintain our GGM-derived PBV TP of RM6.30 (COE: 11.2%, TG: 3.5%, ROE: 10.5%) and OP call. We anticipate CIMB to remain strong with regards to its earnings delivery and books management. The most prominent risk lies with unexpected impairments which we reckon could be low in the present climate. Meanwhile, other guidances may be on track to meet expectations. Our assumptions are unchanged post-briefing. CIMB is one of our 4QCY23 top picks.

CIMB hosted a sell-side 3QFY23 pre-results briefing yesterday. Key takeaways are as follows:

1. Loan growth likely as anticipated. The 6%-7% guidance on loan growth will likely be met on the group’s expectation that moderate growth will be protracted from supportive economic conditions, albeit likely not as vibrant. We opine the group’s target may be conservative having reported a 3.3% QoQ loan growth and 8.3% YoY.
    
2. NIMs pressure to subside. The group opined that the worst is over with regards to domestic deposits competition, with the group having progressively trimmed product rates to sustain margins. On the other hand, Thailand and Indonesian operations may incur higher funding costs as a reaction to the competitive climate there. Offsetting anticipated recoveries in Malaysia, we may still experience a net margin compression on a group level (FY23 target at 5−10 bps decline).
    
3. Forex volatility not a concern. Amidst ongoing fluctuations of the ringgit, the group believed the overall impact may be contained as volatility could still drive trading and forex gains. Mitigating this may be overall lower fees, which may also experience sequential decline given 2QFY23’s lumpier recording of NPL sales as well as certain wholesale fee income.
    
4. Higher expenses likely in tandem with top line. The group continued to expect operating costs to further rise. Notwithstanding the recent union wage adjustments from collective agreements, CIMB has also been investing more heavily into marketing and establishment costs to keep up with stronger business activities. That said, cost-income ratio may still remain flattish at c.46.5% per last guidance, indicating cost control is still in check.
    
5. Unworried on asset quality. There appears to be fewer signals which would trigger the group to further tighten its asset quality management. As business climate normalises (ex-Covid relief measures), GIL levels are likely to remain contained with overlays still providing sufficient buffers against unexpected headwinds. Additionally, the group may not be exposed to recently troubled names in the airline industry, which could reduce the likelihood of unexpected topping up of provisions.

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

Maintain OUTPERFORM and TP of RM6.30. Our TP is based on an unchanged GGM-derived FY24F PBV of 0.92x (COE: 11.2%, TG: 3.5%, ROE: 10.5%). We also applied 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 (21% vs. industry average of 8%) while offering attractive dividend yields (c.6%) in the medium term. The group’s recent return to double-digit ROE delivery could be a clarion call to past investors as well. CIMB is one of our 4QCY23 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 - 25 Oct 2023