Review

• CIMB reported a 1H23 net profit of RM3,418mn, translating to a 26.2% YoY increase compared to RM2,707mn in 1H22. CIMB’s reported net profit came within expectations at 55% and 53% of ours and consensus forecasts. Annualised ROE stood at 10.6%, within FY23 guidance of 10.2-11.0%.

• An all-cash first interim dividend of 17.50 sen/share was proposed, translating to a payout of 55% (1H22: 50%).

• Operating income broadened by 7.4% YoY, underpinned by a 32% YoY (14.4% QoQ) expansion in the non-interest income (non-NII). Non-NII rose due to the steep improvement in Treasury & Market’s and FX income. The sale of impaired loans in Indonesia and Thailand also lifted Non-NII. Fee & commission, however, remained lacklustre as it contracted by 0.2% QoQ and 5.5% YoY.

• Net interest income (NII) slipped QoQ and YoY as the increase in loan growth was largely offset by net interest margin (NIM) contraction. YoY, the NIM compressed by 22 bps to 2.25%. QoQ, NIM slipped by another 2 bps. Meanwhile, total gross loans advanced by 3.3% QoQ and 8.3% YoY. Loans and advances continued to be supported by a rising momentum in Consumer Banking (+6.7% YoY), Wholesale Banking (+11.2% YoY) and Commercial Banking (+8.0% YoY). Excluding FX fluctuations, loans and advances grew in all key operating markets, led by Thailand (+10.8% YoY), Indonesia (+8.6% YoY), Singapore (5.3% YoY) and Malaysia (+4.7% YoY).

• Total deposits broadened by 9.5% YoY and 4.0% QoQ. The increase was led by Consumer Banking (+16.3% YoY), followed by Commercial Banking (+12.9% YoY). Deposits from Wholesale Banking rebounded to increase by 1.5% YoY (vs. a decline of 2.6% YoY in 1Q23). CASA balances contracted again by 0.3% YoY (+5.7% QoQ), bringing the CASA ratio to 38.5% vs. 39.9% in FY22.

• Operating expenses expanded by 2.6% and 6.2% YoY, broadly due to a rise in underlying overall cost. Yearly, Personnel expenses grew by 5.4% YoY and 7.2% QoQ. Technology investments (+6.7% YoY, +12.5% QoQ), Establishment expenses (+9.1% YoY, +2.9% QoQ) and Marketing expenses (+65.1% YoY, +15.2% QoQ) also drove operating costs. Management noted that the higher operating income was partially offset by lower Admin & General expenses due to tactical cost optimisation. On the back of positive JAWs, the cost-to-income (CTI) ratio improved to 45.1% vs. 46.0% in 2Q22.

• Provisions were well contained, with total provisions declining by 2.2% QoQ and 2.9% YoY due to the release of overlays from commitments and contingencies and the absence of double credit-related provisions. Nevertheless, total loan provisions increased by 82.4% QoQ and 16.3% YoY, attributed to lower release of overlays along with lower recoveries and writebacks.

• Taken together, the 1H22 loan loss charge improved to 38 bps vs. 51 bps in FY22. Elsewhere, the gross impaired loans ratio held steady at 3.3% (FY22: 3.3%) 1H22, while the allowance coverage stood at 91.6% (FY22: 93.1%).

• CIMB remains backed by a decent capital position with a Common Equity Tier 1 (CET1) Capital Ratio and Total Capital Ratio of 14.2% and 17.8%, respectively. LCR remains comfortably above 100% for all banking entities.

Impact

• No change to our earnings estimates.

Outlook

• CIMB's 1H23 performance demonstrates improving momentum from nonNII, loan growth, and healthy asset quality. Management noted that the group will benefit from its diversified ASEAN portfolio as more robust performance is envisaged in Indonesia and Singapore. Given the healthy growth trajectory, CIMB appears to be on track to exceed some of its FY23 targets. As such, management revised up some of its guidance for FY23, such as 1) loans to grow by 6-7% (from 5-6%), and 2) loan loss charge to improve to 40-45 bps (from 45-55 bps). NIM pressure is also expected to subside.

• Despite the optimism, management maintains a cautious stance given global headwinds, elevated interest rates and heightened deposit competition. Earnings pressure could come from higher costs due to technology and operational investments. CIMB will also focus on strengthening the CASA and deposit franchise to arrest further NIM compression.

Valuation

• We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, we raised CIMB’s TP to RM6.40 from RM5.50. Our valuation is based on an implied PBV of c. 1.01x based on the Gordon Growth Model. Buy reiterated on CIMB

Source: TA Research - 1 Sept 2023