We maintain our GGM-derived PBV TP of RM6.30 (COE: 11.2%, TG: 3.5%, ROE: 10.5%) and OP call. We are assured by CIMB’s portfolio of digital assets with several key names looking to turn black soon. We opine that with its capabilities at hand, the group may not be overly disrupted by the entry of digital banks in Malaysia in the coming months. CIMB is one of our 4QCY23 top picks.

CIMB hosted an Investors Day to highlight its digital businesses. Aside from more prominent local operations via Touch ‘N Go and TNG Digital (TNGD), CIMB Philippines and CIMB Vietnam were also frontrunners with digital banking solutions in those regions. Key takeaways are as follows:

1. Key component to ROE expansion. CIMB’s digital assets appear to now be operating more efficiently, thanks to their consistent growth in market share expansion and scale. Accordingly, losses have narrowed drastically and are expected to be earnings accretive to the group, possibly contributing to group-level ROE expansion by 17bps. Recall that CIMB’s Forward23+ target for ROE is 11.5%-12.5%.

2. Future-proofing the TNG brand. The group’s wholly-owned Touch ‘N Go unit remains a key component to its growth strategy for its stronghold in payments solution. The increasing integration of its services for day-to-day transactions may likely be unhindered, given a significantly heavy barrier of entry into its single provider market. The group opines there are more opportunities which could be unravelled via the potential implementation of open payment platforms as well as an evolving B2B landscape.

3. TNGD a rising gem. More relatable for its eWallet offerings, TNGD looks to capitalise on a specialist mindset as serving customers within its ecosystem may be more profitable than in a digital banking model. As of 1HFY23, it is estimated that TNGD has over 20m registered customers, of which c.15m were acquired via e-KYC. In addition to a network of over 1.0m merchants and an estimated >50% e-money market share (RM42.4b), the group is hopeful it could achieve profitability in FY24. That said, the TNGD could still tap into the lending market with a purpose-based approach as opposed to general disbursements which may pose recovery risks. The launch of its GoPinjam product for short-term - a micro loan that could serve as a precursor to what other digital banks may offer in the country.

4. CIMB Philippines’ path to breakeven. CIMB Philippines was established in Dec 2018, although efforts to enter the market commenced in 2012. Operating without branches, it had a heavy focus on mobile based and digital offerings. Additionally, strong collaborations with partners made penetration into the mass market more effective and scalable. Notable partners include Shopee, SeaMoney, GCash and GSave. Thanks to a solid ecosystem, CIMB Philippines had acquired 7m customers in May 2023 of which 55% are first-time bankers. The group opines that CIMB Philippines could break even within FY23 as it is getting closer to sustainable economies of scale.

5. Greater tussle in Vietnam. CIMB Vietnam was a forerunner in introducing digital solutions in the country, being the first to issue a virtual debit card there. It ramped up on digital solutions in 2016 with a platform-driven strategy while also tapping on strong partners to provide holistic offerings and shared customer base. Overall, CIMB Vietnam had access to up to 850k customers in 1HFY23. However, it is not the largest digital bank in Vietnam, behind VPBank Neo (4.5m customers), CAKE (3m) and TNEX (1.5m). That said, the group will continue to maintain its presence there as learnings from other regions may bolster its market share and longevity in the country.

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

Maintain OUTPERFORM and TP ofRM6.30. 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 - 1 Nov 2023