• Stay BUY, TP dips to MYR6 from MYR6.10, 25% upside with c.6% FY23F yield. CIMB’s 1Q23 results are in line with expectations. Key positives were robust non-interest income (Non-II), opex discipline and stable asset quality, while NIM compression was the main negative. It is now guiding for a higher NIM compression of 10-15bps (from 5-10bps), but management is confident that there is sufficient Non-II traction – and is retaining its FY23 ROE target. This sector Top Pick is trading at an undemanding 0.75x FY23 P/BV against our more conservative FY23F ROE of 9.5%.

• 1Q23 net profit rose 15% YoY or +24% QoQ to MYR1.6bn, accounting for c.26% of our and Street FY23F earnings. 1Q23 PIOP dipped by 3% QoQ, largely on NIM pressure – cushioned by better Non-II (strong trading and FX) and lower opex (seasonal spike in 4Q). Credit cost dropped to 30bps from 71bps in 4Q22 (4Q: top-up provisions, 1Q23: RM177m overlay writebacks) and, as such, PBT rose 11% QoQ. Reported ROE of 10.3% is tracking FY23’s target of 10.2-11%, while its CET-1 ratio was healthy at 14.3%.

• NIM slipped 31bps QoQ (-19bps YoY) mainly due to Malaysia (MY) with a c.30bps QoQ compression while its operations in Singapore (SG), Indonesia (IND) and Thailand (TH) saw NIM decrease by 10-20bps. On a more positive note, deposit competition has moderated, and CIMB managed to cut promotional fixed deposit rates without impacting volume adversely in April- May – and this was notwithstanding May’s overnight policy rate hike.

• Gross loans expanded 7% YoY (+2% QoQ), driven by IND (+10% YoY) and TH (+14% YoY). Meanwhile, total deposits rose 6% YoY (+2% QoQ) led by fixed deposits while CASA fell 8% YoY (-4% QoQ). As such, group CASA ratio at end-March eased to 37.9% (Dec 2022: 39.9%). CIMB was positive on IND’s (ratio to pick up to 63-65% vs 1Q23: 61%) and TH’s (led by retail and wholesale) CASA momentum, while MY consumer CASA attrition is slowing.

• Asset quality held up with GIL ratio and LLC stable QoQ at 3.22% and 94.2%. Management explained that the overlay writebacks in 1Q23 resulted from the release from stock after MY consumer and SME loans had passed the monitoring period. CIMB’s intention is to reallocate rather than release the remaining buffers. More details will be shared later.

• Others. CIMB shared its 2024 ROE target of 11.5-12.5% and drivers (Figure 3). Notably, management sees a more resilient franchise (eg ID and digital assets are agnostic to the economic cycle) with better earnings stability (larger provision buffers to shield against credit cost spikes), giving CIMB increased confidence around its target.

• No change to earnings forecasts. We had assumed a steeper FY23 NIM contraction of 12bps from 7bps post recent pre-results meeting. However, we trim our TP by 2% to MYR6 – reflecting the ESG discount that we now ascribe (vs nil previously) following the recalibration of our in-house ESG weightage methodology. With a greater focus on the E pillar due to climate change issues, we have tweaked our ESG weightage. For further details, see our research note titled Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023