• Maintain BUY, TP drops to MYR6.10 from MYR6.40, 20% upside with c. 6% FY23F yield. At yesterday’s sell-side analyst meeting, we gathered that NIM pressure could be more severe than expected due to funding cost pressures. On the flip side, deposit competition may be turning more rational. Otherwise, non-interest income (non-II) remains healthy while asset quality is stable. We trim FY23-25F net profit by 4-5% on the steeper NIM squeeze, and shave our GGM-derived TP to MYR6.10. Our thesis that efforts to reposition the group are bearing fruit remains unchanged.

• Intense competition for retail and wholesale deposits followed through into 1Q23… This was most acutely felt at home, while there was also some pressure from regional operations. CIMB thinks the level of competition has become irrational as – despite ample liquidity and stable loan growth – promotional fixed deposit (FD) rates offered in some cases had exceeded loan yields for certain products. However, it also highlighted some potential green shoots. Post the decision to keep the overnight policy rate (OPR) unchanged in March, deposit rates eased off as depositors appear to have reassessed the OPR trajectory. CIMB managed to reduce its campaign FD rate by 10bps in April without impacting volume, and aims to reduce the rate by another 10bps in May – possibly more, if BNM maintains the policy rate.

• …leading to greater NIM pressure. Following from the above, CIMB guided for NIM to contract meaningfully QoQ. QoQ, the NIM delta is expected to be the largest in 1Q23 but the squeeze should start slowing down in 2Q, and stabilise thereon. CIMB also said raising loan yields in 2H was under consideration, to cushion NIM pressure. Overall, management saw downside risks to its 2023 NIM compression guidance of 5-10bps. As such, we now forecast 2023 NIM to fall by a larger 12bps YoY vs 7bps previously, but continue to assume NIM stabilises next year.

• Non-II still a bright spot … and was stronger than expected due to trading and FX, and this was across its main markets. Apart from that, gains from sale of NPLs in Indonesia and Thailand have helped. Such sales are expected to be ongoing, as part of the group’s strategy to manage NPLs.

• … while asset quality stable. No major issues noted in 1Q. Delinquencies for some retail products have gone back up to pre-pandemic levels while others are still below that – but overall, are largely within expectations. Specifically for construction and real estate developers, exposure is minimal.

• Capital. With the 4Q22 CET-1 ratio at a comfortable 14.5%, CIMB sees scope for capital management in the form of one-offs or special dividends to drive ROEs higher. It will be watching what its peers are doing and will need to take into account the regulator’s comfort levels.

• Others. Potential changes to Rule 78 – impact should be gradual and relatively minimal. Separately, CIMB Niaga (BNGA IJ, BUY, TP: IDR1,450) reported robust 1Q23 net profit growth (+32% YoY and QoQ) yesterday, thanks to healthy NoII, controlled expenses and lower loan provisions. This should support 1Q23 group earnings.

Source: RHB Research - 28 Apr 2023