• Maintain BUY and MYR6 TP, 10% upside with c.5% FY23F yield. At CIMB’s pre-closed period meeting yesterday, we gathered that NIM pressure appears to be alleviating, with a 2H23 recovery being a possibility. Overall, its 2Q23 operating income looks decent and, while delinquencies ticked up, ample provisioning buffers will help shield the impact on earnings – 2Q23 results (out on 30 Aug) should be on track to meet our and consensus expectations. Our thesis that efforts to reposition the group are bearing fruit remains unchanged. CIMB is one of our sector Top Picks.

• 2Q23 operating income could be decent – loan growth momentum improved … thanks to wholesale drawdowns from regional operations (vs chunky repayments in 1Q). In Malaysia (MY), the growth momentum was sustained, supported by both retail and non-retail segments.

• … while Non-II strength sustained. Meanwhile, CIMB guided for another strong quarter for Non-II. Recall that 1Q23, Non-II rose 24% QoQ and YoY, driven by trading and FX. In 2Q23, expect a sequential Non-II improvement, led by healthy trading and FX gains for MY and gains from NPL sales over in Indonesia (IND). On the flip side, investment bank deal flows were muted in 2Q, but management sees a pickup in 2H as the deal pipeline for MY looks good. Other efforts to sustain Non-II include ongoing NPL management to reduce the volatility of such gains, as well as the redeployment of liquidity in Singapore (SG) into treasury and markets products (vs loans) – better Non- II, but with some impact on NII and NIM.

• NIM – bottoming process underway. CIMB guided that group NIM would compress QoQ, albeit at a significantly smaller delta vs -31bps QoQ in 1Q23. In Thailand and IND, efforts to raise NIMs have started to be felt in 2Q, and the 2H23 trajectory looks positive. For MY, the repricing of maturing longer- term deposits from the cumulative overnight policy rate (OPR) hikes will continue to weigh on 2Q NIM, but CIMB highlighted that following May’s OPR hike, asset yields have been repriced. Meanwhile, deposits rates were maintained, which will be positive for 2H NIM trajectory. In SG, while liquidity has been flush, NIM has peaked and is expected to continue to remain under pressure ahead due to the ongoing repricing of deposits and, as mentioned above, the redeployment of liquidity into treasury products.

• Uptick in delinquencies, but sufficient provision buffers to absorb. Retail delinquencies have continued to rise due to inflation and from certain quarters where income streams have yet to normalise. That said, the rise is still within CIMB’s expectations and, more importantly, its overlays have been able to absorb the impact. Management sees delinquencies peaking in 4Q23. Also, CIMB has reallocated the bulk of its pandemic-related overlays to segments vulnerable to inflationary pressures – it has frontloaded potential provisioning, should the rollback in subsidies materialise. Finally, CIMB said its dual- pronged approach to LLC levels targets both the level of provisions and GIL levels, so we should see more proactive GIL management ahead.

Source: RHB Research - 26 Jul 2023