• Maintain BUY and MYR7.00 TP, 22% upside with c. 5% FY23F yield. At yesterday’s sell-side analyst meeting, we gathered that while the outlook for operating income seems decent and asset quality looks stable yet opex and funding cost are also on the rise and would dampen earnings growth. Near- term, a sequentially weaker 4Q22 looks to be on the cards but appears to be expected. CIMB is a sector top pick as its risk-reward balance remains favourable: FY23F P/BV of 0.9x against ROE of 10%. Our TP is based on a GGM-derived intrinsic value of MYR6.98 (0% ESG premium/discount).

• Look beyond a “noisy” 4Q. CIMB’s 4Q22 results are expected on 28 Feb. Our full-year net profit estimate of MYR5.1bn (-4% vs consensus) implies 4Q22 net profit of MYR990m (-30% QoQ/+16% YoY). CIMB guided yesterday to anticipate a sequential bump up in costs: i) Funding (deposit competition, partly seasonal), ii) opex (year-end accrued expenses, variable compensation), and iii) credit (higher overlays for Malaysia non-retail, Indonesia steel). Income was decent as asset yield continued to be repriced while non-II benefited from better fee and trading income. We suggest investors to look beyond the results and instead focus on the trajectory of deposit competition, asset quality, and operating income, among others.

• Keeping an eye out for funding cost and opex … CIMB thinks funding cost could continue to see upward pressure due to a combination of changing deposit structure (eg switch from low cost CASA to higher cost fixed deposits, shorter term fixed deposit placements to benefit from rate hikes) and deposit competition, especially for longer tenor deposits. Flipside, the competitive landscape has not deteriorated further and more importantly, liquidity is still ample. Meanwhile, 2023F opex growth is guided to accelerate further with the rise due to broad-based cost inflation. More colour on how CIR is expected to shape will be provided at the results briefing. 9M22 CIR was 46% vs FY21 business-as-usual CIR of 49%.

• … but overall the operating income looks decent. Despite the competitive deposit landscape, CIMB did not appear overly concerned. Further overnight policy rate hikes in Malaysia (50bps expected in 1H23) coupled with pricing power and excess liquidity in Indonesia will help cushion some of the funding cost pressures. Management now sees a delay in the peak in NIM from the earlier expectation of 3Q22. Also, loan growth remains well supported by demand from consumer and commercial while fee, trading, and FX income should see improvement at the non-interest income side.

• Room for equity risk premium to fall? Asset quality looks stable despite the recent rate hikes by regional central banks. Delinquencies for consumer is currently below pre-COVID 19 levels although management believes this will slowly trend back to pre-pandemic levels in the coming quarters. CIMB has bulked up its loan loss coverage levels to c.100% and plans to keep it at 90-100%, up from an average of c.80% post-Global Financial Crisis .

Source: RHB Research - 27 Jan 2023