• Maintain BUY and MYR6.50 TP, 18% upside and c.6% FY23F yield. In a sell-side analyst meeting ahead of 3Q22 results in late-November, updates from management suggest that CIMB and its customers are managing well despite the challenging environment. We expect the meaningful NIM uplift will boost NII, uptick in credit cost on continued prudence in loan provisions, and improved CIR. The risk-reward balance is favourable with FY23F P/BV of 0.9x against ROE of >9%. Our TP is based on a GGM-derived intrinsic value of MYR6.42, with a 0% ESG premium/discount.

• Further rate hikes – the tailwind for NIM. The cumulative 75bps rise in Bank Negara Malaysia’s (BNM) overnight policy rate (OPR) between May and Sep 2022, will see meaningful uplift in CIMB’s NIM in 3Q22 (2Q22: +2bps QoQ). Already, CIMB Niaga (BNGA IJ, BUY, TP: IDR1,270) reported a 14bps QoQ increase in 3Q22 NIM. CIMB believes OPR would rise another 25bps in Nov 2022 and 50bps in the later part of 1H23, providing tailwinds for margins. That said, NIM expansion would slow in 2023 as rise in cost of funds catches up. Deposit rates are trending up while CASA deposits are declining on the switch of funds to fixed deposits. To recap, a 25bps OPR hike would translate to an annualised uplift of MYR80-100m in NII and 2-3bps in NIM.

• Borrowers able to absorb rate hikes. Loans under moratorium as well as rescheduled and restructured (R&R) loans, are stable QoQ at 3% of Malaysia and group loans (Dec 2021: 20%). Currently, CIMB’s business banking and corporate customers continue to see very good underlying demand. Notwithstanding the external macroeconomic headwinds, the bank does not expect a severe economic downturn as there are no signs of distress or systemic pressures.

• Credit cost is, however, expected to be higher in 3Q22 (2Q22: 49bps) on uptick in impairments for the retail portfolio and top-ups for legacy accounts in the steel sector. Management had guided for credit cost of 50-60bps for FY22F (1H22: 41bps). Stock of provision overlays, which stood at MYR2.7bn in Jun 2022, will be maintained till 4Q22. Elsewhere, there are no significant developments relating to the double crediting of customers’ account in late 2021.

• Softer non-II. Non-II is expected to be weaker than the MYR1.2bn in 2Q22. Trading and FX income was stable QoQ despite the volatile capital markets. But this would not be sufficient to compensate for the absence of lumpy deal- related fees in Singapore and Malaysia as well as loan recoveries and NPL sales at CIMB Niaga in 2Q22.

• Opex well controlled. The persistently high global inflation is exerting some pressures on operating expenses. Still, costs remain well controlled with 9M22 opex expected to increase by low single digit. We believe this is helped by the c.MYR430m cost take-outs identified for FY22. CIMB is targeting CIR of <48% for FY22F (1H22: 46.5%).

Source: RHB Research - 1 Nov 2022