• Maintain BUY on this sector Top Pick, new TP of MYR6.88 from MYR6, 22% upside with c.6% FY24F yield. CIMB’s 2Q23 results were a slight beat, mainly as non-II remained robust. Credit cost has also been milder than expected. Standouts: i) Solid loan and deposit growth, especially CASA (+6% QoQ); ii) good pricing discipline – NIM was just marginally lower (-2bps QoQ); iii) well-controlled opex; and 4) a higher dividend payout. Although its ROE of >10% is above its COE, the stock is trading at an unjustified 0.87x FY24F P/BV. We see headroom for a positive market rerating.

• 2Q23 earnings rose 8% QoQ (+38% YoY) to MYR1.8bn, bringing 1H23 net profit to MYR3.4bn (+26% YoY), at c.55% and 53% of our and consensus FY23F PATMI. The read-through was solid: i) NII rose by 14% QoQ on higher loan growth; ii) Non-II rose 4% QoQ from treasury and markets; iii) Opex rose 3% QoQ. Adequate accruals kept impact from the collective agreement (CA) minimal; and iv) Loan impairments grew 6% QoQ, with an uptick in provisions for non-retail cushioned by overlay writebacks. Reported ROE of 10.6% is tracking FY23’s target of 10.2-11%, while CET-1 ratio was healthy at 14.2%. An interim DPS of 17.5 sen was declared (payout ratio of 55%; 1H22: 13 sen, 50% payout).

• Gross loans expanded 3% QoQ (+8% YoY), as the non-retail segments gained momentum while consumer was stable. By geography, growth was driven by overseas units – Indonesia (+7% QoQ) and Singapore (+12% QoQ). Meanwhile, total deposits rose 4% QoQ (+9% YoY) and, more impressively, CASA was up 6% QoQ (flat YoY) on good non-retail CASA traction. Group CASA ratio at end-2Q23 rose to 38.5% (Mar 2023: 37.9%). CIMB raised its FY23 loan growth target to 6-7% from 5-6%. Further out, it is now comfortable with the Indonesia commercial loan book, and growth should accelerate.

• NIM eased 2bps QoQ (-23bps YoY) notwithstanding the strong deposit growth. CIMB revised down its NIM guidance to 15-20bps NIM compression vs a 10-15bps decline previously. That said, 1H23 NIM of 2.26% was 25bps lower vs the 2022 NIM of 2.51%, which could imply some NIM recovery in 2H. Already, CIMB had lowered its deposit campaign rates by 5bps in July and August, without materially impacting volumes.

• Asset quality contained despite GIL ticking up 7% QoQ (mainly domestic). GIL ratio and LLC stood at 3.3% and 92.2%. COVID-19-related overlays at end-2022 was MYR2bn, of which MYR1.4bn relates to Malaysia. The bulk of this has been reallocated and management continued to guide that it intends to retain as much of its overlays as possible due to the current macroeconomic uncertainties, and maintain LLC at comfortable levels.

• Earnings forecasts upped by 2-3% on stronger non-II projections, partly offset by a steeper NIM decline of 18bps for FY23 (from 12bps). However, we increase FY23-25F DPS by 12-13%, as we raised our payout assumptions to 55% (from 50%). Dividend yields are now at an attractive 6- 7%. Our TP rises to MYR6.88 from MYR6 on a refreshed ROE assumption and a roll forward in valuations, with a 2% ESG discount imputed.

Source: RHB Securities Research - 1 Sept 2023