CIMB Group Holdings Berhad - Better-Than-Expected Loan Loss Charge

Date: 
2023-12-01
Firm: 
TA
Stock: 
Price Target: 
6.60
Price Call: 
BUY
Last Price: 
6.41
Upside/Downside: 
+0.19 (2.96%)

Review

  • CIMB reported a 9M23 net profit of RM5,266mn, translating to a 28.0% YoY increase compared to RM4,115mn in 9M22. CIMB’s reported net profit came above expectations at 84% and 81% of ours and consensus forecasts. Annualised ROE stood at 10.7%, within FY23 guidance of 10.2-11.0%.
  • Operating income broadened by 7.0% YoY, underpinned by a 35% YoY (- 8.1% QoQ) expansion in the non-interest income (non-NII). Non-NII rose due to the steep improvement in the trading and FX income amounting to RM2,392mn vs RM1,322mn a year ago. The sale of impaired loans in Indonesia and Thailand also lifted Non-NII. Fee & commission, however, remained lacklustre as it contracted by 1.7% YoY. Nevertheless, the fee & commission income rebounded sequentially, growing by 6.2% QoQ.
  • Net interest income (NII) slipped by 1.8% YoY but grew by 3.0% QoQ. Although loans rose at a healthy pace of 6.4% YoY (+1.1% QoQ), NII fell due to the contraction in the net interest margin (NIM). YoY, NIM has compressed by 24 bps to 2.25% due to the higher cost of deposits. QoQ, NIM broadened by 1 bp. By segment, loans and advances continued to be supported by growths in Consumer Banking (+6.1% YoY), Wholesale Banking (+6.8% YoY) and Commercial Banking (+6.1% YoY). Excluding FX fluctuations, loans and advances grew in all key operating markets, led by Thailand (+11.8% YoY), Singapore (7.0% YoY), Indonesia (+5.2% YoY) and Malaysia (+4.2% YoY).
  • Total deposits broadened by 8.6% YoY and 0.8% QoQ. The increase was led by Consumer Banking (+17.7% YoY), followed by Commercial Banking (+11.3% YoY). Deposits from Wholesale Banking however, contracted by 1.3% YoY. CASA balances recovered by 2.1% YoY (+2.6% QoQ), bringing the CASA ratio up QoQ to 39.2% from 38.5% in June 2023.
  • Operating expenses expanded by 7.4% YoY and 3.6% QoQ, broadly due to a rise in underlying overall cost. Yearly, Personnel expenses grew by 6.0% YoY (-1.1% QoQ). Technology investments (+8.6% YoY, -4.7% QoQ), Establishment expenses (+9.1% YoY, unchanged QoQ) and Marketing expenses (+60.3% YoY, +31.6% QoQ) also drove operating costs. Management noted that the steep increase in marketing expenses was also attributed to Philippines partnership cost linked to revenue growth. The cost-to-income (CTI) ratio stood at 46.9% vs. 45.5% a year ago.
  • Provisions were well contained, improving by 28.3% QoQ and 15.9% YoY due to the release of overlays and lower loan impairment. Taken together, the 9M23 loan loss charge improved to 32 bps vs. 51 bps in FY22. Elsewhere, the gross impaired loans ratio also strengthened to 3.2% (FY22: 3.3%) in 9M23, while the allowance coverage climbed to 95.0% (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 14.4% and 17.9%, respectively. LCR remains comfortably above 100% for all banking entities.

Impact

  • We tweaked our loan loss charge assumption to 44/38/32 bps from 52/48/44 bps to align with the better-than-expected 9M results performance. With that, we raised CIMB’s FY23/24/25 net profit to RM6,512/7,154/7,543mn from RM6,247/6,797/7,117mn.

Outlook

  • CIMB's 9M23 performance continues to demonstrate improving momentum from non-NII, loan growth, and healthy asset quality. Efforts to strengthen its deposit franchise and arrest declining CASA are showing positive results. 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 achieve most of its FY23 targets. However, given the healthy asset quality performance, management is revising the loan loss charge again, expecting it to improve to 35-45 bps (from 40-45 bps). NIM pressure is also expected to subside.
  • Despite the optimism, management maintains a cautious stance given global headwinds, elevated policy rate environment and ongoing inflationary pressures, citing cost and asset quality as potential downside risks to earnings.

Valuation

  • We raised CIMB’s TP to RM6.60 from RM6.40 due to the upward revision to our earnings estimates. Our valuation is based on an implied PBV of c. 1.05x based on the Gordon Growth Model. Buy reiterated on CIMB.

Source: TA Research - 1 Dec 2023

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