The Banking industry could face hindrances to interest income due to heightening competition for funds as the maturity of past termed deposit products could further drag funding costs on renewal. Still, this is widely expected in reflection of rising rates, which could also hamper asset quality. CIMB’s position is at least secured by better-thanpeer readings of its non-interest income (NOII). BUY with a TP of RM6.40 based on PBV of 0.88x (COE: 11.0%, TG: 3.0%, ROE: 10.5%) with an applied 5% premium granted by CIMB’s 4-star ESG ranking thanks to headways in green financing.

The group hinted of continual price competition of deposits, but this was widely anticipated given Nov 2022 OPR hike. However, owing to maturing long-term deposits, a refresh of now higher interest rates will likely cause a more noticeable dent in margins as compared to prior quarters. During its 3QFY22 earnings presentation, the group maintained its 50- 60 bps credit cost guidance for FY22. This indicates room for additional provisions ahead of its 9MFY22 annualised credit cost of 43 bps. The group has now identified the need for further overlays with specific allocation to non-retail accounts and legacy portfolios in the Indonesian steel industry. Our assumptions reflect a possible net charge of >RM700m in 4QFY22 (3QFY22: RM478m) to achieve this, amounting to >RM2bn in total FY22 net provisions. Still, this is an improvement from FY21’s RM2.61bn net impairment.

Banks saw a lull in non interest income due to poor sentiment dragging investment trading and forex exposures. The group anticipates stronger performance in 4QFY22 as macros were supportive of higher fee income and trading activities. CIMB was one of the better performing banks in NOII, thanks to lumpier portfolio recoveries reported throughout FY22.

We note that our credit cost assumptions are highly conservative at 63 bps (against 50-60 bps guidance) to buffer against possible surprises as asset quality outlook is highly uncertain. Fundamentally, the stock is supported by its regional diversification. CIMB’s double-digit ROE could be indicative of its prospects, led by better forward earnings growth (27% vs. industry average of 23%) while offering attractive dividend yields (6%) in the medium-term. CIMB is one of our 1QCY23 Top Picks.

Source: Rakuten Research - 27 Jan 2023