CIMB Niaga’s 9MFY23 net profit was within expectations but may see some pressures with moderating NIMs coupled with potentially slowing loan growth. While asset quality risks may arise, current provisions may be sufficient to address immediate underlying concerns. We maintain our forecasts, GGM-derived TP of RM6.30 and OUTPERFORM call for CIMB. The stock is one of our 4QCY23 top picks.

9MFY23 within expectations. CIMB’s 91.5%-owned CIMB Niaga (Niaga) reported 9MFY23 earnings of IDR4.90b which is 80% of consensus’ full-year estimates.

YoY, 9MFY23 net interest income improved by 2% with an enlarged loan and shariah financing book (5%). That said, NIMs posted a flattish decline (4.66%, -1 bps) as funding cost pressures begin to emerge. On the other hand, non-interest income increased by 8% mainly thanks to greater loan recoveries, albeit reporting a QoQ decline due to lumpier recognition in 2QFY23. Overall cost-to-income ratio is largely stable (45.5%, -0.3ppt) but with lower credit costs of 110 bps (-75 bps), 9MFY23 net profit of IDR4.90b (+28%).

Niaga’s outlook. In spite of record results seen in 3QFY23, Niaga acknowledges there could be several headwinds incoming. Funding costs have notably been catching up and outpacing gains in loan interest yields no thanks to a less favourable rate environment in Indonesia. This may be protracted into the coming quarters, leading the group to tone down its FY23 NIM target of 4.6%−4.8% to 4.45%−4.55% which indicates more pressures in 4QFY23. On the flipside, the group had cut its credit cost guidance from 1.6%−1.8% to 1.1%−1.2%. While this reflects mostly stable conditions in 4QFY23, the group errs on the side of caution going into FY24 as there could be signals of slowing activity. This could undermine loan growth in the near term as well, namely with its corporate portfolio.

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

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 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 - 30 Oct 2023