CIMB Group Holdings - Out to Widen Profit Margins

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CIMB’s FY23 net profit (+28%) was within expectations but surprised us with higher-than-expected dividends due to specials being declared. We reckon the group is eyeing moderate but well managed growth in favour of regaining lost NIMs during FY23’s intense competition for funds. We raise our FY24F earnings by 3% on model updates. Maintain MP with a higher rolled over GGM- derived PBV TP of RM6.60 (from RM6.30).

FY23 within our expectation. CIMB’s FY23 reported net profit of RM6.98b met expectations. However, an 18.5 sen interim dividend and 7.0 sen special dividend announcement translated to a full-year payment of 43.0 sen (65% payout) which beat our anticipated 35.0 sen target. The group appears receptive to offer more generous dividend disbursements going forward from its c.50% historical average.

YoY, FY23 net interest income declined slightly (-2%) owing to higher funding costs which dragged NIMs (2.22%, -29bps). That said, non- interest income surged 35% from better trading performances and fees. Operating margins were relatively stable while lower credit costs (32 bps, -19bps) on improved asset quality especially in its retail segment. In addition to lower effective taxes, FY23 net profits came in at RM6.98b (+28%).

QoQ, 4QFY23 total income improved slightly thanks to support from better fees garnered while NIMs continued to be under pressure. Credit cost rose to 31bps (+10bps) during the quarter to top up on certain Thailand retail account, resulting in 4QFY23 net profit to report at RM1.72b (-7%).

Briefing highlights. The group had solidly met most of its FY23 targets, while only shy of achieving its cost-income target of <46%. Its FY24 targets would focus on growing sustainability and at a reasonable pace.

1. FY24 loans growth target of 5%-7% reflects a slowing momentum from its 8% trajectory in FY23. The group aims to keep profitability in mind and appears willing to compromise on some market share to bolster margins. Notably, Singapore and Indonesia had outperformed other regions with their loans book expansion and may continue to do so.

2. With regards to margins, most of its regional units are in lieu to reflect sequential recoveries with the similar intent to not overly compete in product pricing. We reckon this could be enabled by the brand stickiness, leading it to buck the trend amongst its large cap peers and to target NIMs expansion instead. Given the group has a leading position in its markets, improving NIMs could provide the greatest impact to its earnings.

3. Personnel cost was mainly affected by collective agreements seen in Malaysia in FY23. To balance its cost structure, the group shared that it is in the midst of optimising certain pillars. That said, we gathered that technology investments had also been substantial during the year.

4. Credit cost guidance of 30-40 bps demonstrates stability with the group being keener to reallocate its past overlays into more targeted segments of its books. That said, they appear to be mindful as to not over-provide in relation to its GIL which we believe could provide space for bite-sized write backs.

5. Stronger returns from its digital assets are likely to materialise with CIMB Philippines already breaking even for the group.

Forecast. Post results, we tweak our FY24F earnings by 3% as we incorporate FY23 full-year numbers into our model. Meanwhile, we introduce our FY25F numbers.

Maintain MARKET PERFORM with a higher TP of RM6.60 (from RM6.30), as we rolled over our valuation base year to FY25F. Our TP is based on an unchanged GGM-derived PBV of 0.92x (COE: 11.2%, TG: 3.5%, ROE: 10.5%). We also applied a 5% premium granted by CIMB’s 4-star ESG ranking thanks to headways in green financing. Fundamentally, the stock is supported by its regional diversification, especially in terms of NOII which most of its peers lack. CIMB’s return to double-digit ROE could be indicative of its prospects, led by better forward earnings growth (21% vs. industry average of 8%) while offering attractive dividend yields (c.6%) in the medium term. That said, we believe its merits could have been fairly priced following the reemergence of foreign shareholders into Malaysian equities, stabilising CIMB’s risk-to-reward

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loan growth, (iii) better/worse-than-expected asset quality, (iv) slowdown in capital market activities, (v) currency fluctuations, and (vi) changes to the OPR.

Source: Kenanga Research - 1 Mar 2024

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