• Maintain BUY and MYR6.88 TP, 21% upside and c.6% FY24F yield. Positive takeaways from CIMB’s pre-closed period meeting yesterday were healthy loan pipeline, NIM stabilisation and peaking GIL ratio, but we expect softer non-II and a pickup in opex to dampen 3Q23 bottomline. That said, this should still be within investor expectations given 1H23 net profit made up 53% of our and consensus current FY23F earnings, ie it is expected to report weaker earnings HoH. CIMB remains one of our sector Top Picks.

• Seasonal deposit competition underway, albeit more rational. CIMB said that 3Q NIMs in Malaysia (MY) and Singapore (SG) improved QoQ thanks to efforts to cut MY fixed deposit rates, coupled with policy rate hikes. However, both Thailand (TH) and Indonesia (IND) NIMs were under pressure. On balance, group NIM should be stable to slightly higher QoQ. Looking ahead, the seasonal year-end deposit competition in MY appears underway with some banks looking to lock in funding that can tide them through the coming Lunar New Year. Saving grace is that competition has, thus far, been more rational this time round but 4Q NIM may still be impacted.

• Expect normalisation in loan growth… 2Q23 loan growth accelerated +3% QoQ/+8% YoY, aided by some lumpy wholesale loan disbursements during the quarter. CIMB guided for 3Q growth to normalise in the absence of such chunky drawdowns, but added that the overall loan pipeline was still healthy to support growth for 2024. Also, in a higher-for-longer interest rate scenario, CIMB thinks downside risk could be tilted towards asset quality rather than loan growth, but pointed to mitigating factors to keep credit costs in check.

• …as well as non-fee based non-II. On the non-II front, improved fees from wholesale should lead to sequential fee income strength in 3Q. However, trading and FX, as well as other non-II (mainly gains from sale of NPLs) are coming off a high base in 2Q and are expected to normalise. All in, CIMB guided for softer non-II QoQ, which is within our expectations.

• Catch up spending for opex in 2H. Opex growth is expected to accelerate in 2H (especially in 4Q) as IT and technology projects go live, coupled with higher general and administrative expenses, as well as marketing costs. We have also pencilled in higher opex HoH in our model. Meanwhile, the next round of negotiations for the new Collective Agreement should begin soon and CIMB will be accruing for this in 2024.

• Asset quality – sufficient provision buffers to absorb. CIMB thinks upward pressure on GIL has peaked, which is consistent with the previous guidance for delinquencies to peak in 4Q23. This is despite the latest developments regarding elevated interest rates and rising geopolitical risks as management appears comfortable with the quality of its loan book – pointing to the significant derisking of its balance sheet in TH, IND and SG (eg commercial segment, commodity trade finance) in recent years. Also, provision buffers for the more vulnerable segments to, eg inflationary pressures, have been bulked up thanks to the reallocation of its COVID-19-related overlays. As such, CIMB does not expect significant upside pressure to credit costs.

Source: RHB Securities Research - 25 Oct 2023