• Still BUY with new MYR9.25 TP (from MYR8.90), 12% upside and c.5% FY25F yield. CIMB held its investor day yesterday, showcasing its Singapore operations (1H24: 10% of group loans, 15% of group PBT). Notably, CIMB’s pivot to focus on returns has led to its Singapore operations achieving its Forward 23+ (F23+) target a year ahead of plan. While the stock has done well YTD, we see room for valuations to rise further, with a higher ROE target under the next mid-term plan as a key near-term rerating catalyst.

• Strategy pivot bearing fruit. Management’s pivot to be a niche challenger bank focusing on returns instead of the previous emphasis on scale is bearing fruit. Five strategic themes (Figure 1) support this pivot, with key highlights being: Optimising its deposit structure, reshaping the portfolio towards segments with higher returns, and improving cost efficiency.

• SME segment has been key for deposits... CIMB’s deposit strategy involves diversifying its deposit base (SMEs and financial institutions have proven to be a cheap source of funding) and to leverage off its digital offerings to drive CASA growth (2019-2023 CAGR of 20% vs deposit CAGR of 11%). As such, its CASA ratio rose to 48.7% in 1H24 vs 37.7% at end-2019, while the rise in cost of deposits (1H24 vs 2019) has not been as steep as that of benchmark rates. Consequently, 1H24 NIM expanded to 1.41% vs 1.34% in FY19, and this was achieved notwithstanding a lower LDR of 67.8% (2019: 88.8%).

• …and loans. Similarly, the SME segment has been a key loan driver in Singapore, together with consumer. These segments offer better risk adjusted return on capital (RAROC; Figure 4) and have helped support NIM. To mitigate credit risk, the SME book is well secured by collateral and government guarantees. CIMB has also derisked its loan book by exiting structured trade and commodity finance, and reduced its oil & gas and commodity trading exposures, while being more selective on its customers. 1H24 GIL was 0.8% (2019: 2.5%) while LLC stood at 159% (2019: 41%).

• Cost-saving initiatives including the 2020-2021 cost restructuring exercise, digitalisation, and near-shoring of some middle- and back-office functions have all helped 1H24 CIR drop to 43% from 57% in 2019. Of the MYR1bn group cost takeout between 2020-2022, the Singapore operations contributed MYR66m.

• Opportunities ahead. CIMB remains positive on the prospects for its consumer and SME businesses in Singapore. Broad financial guidance include: i) NIM stabilising at c.1.3% with rate cuts cushioned by higher LDR (CIMB is comfortable with LDR of 80-85%); ii) CoC to normalise at c.30bps (vs net writebacks currently thanks to recoveries); iii) sustainable ROE of 15- 18% (1H24: 24%) and iv) PBT contribution to group at 10-12%.

• No change to our earnings forecasts, but TP upped to MYR9.25 on a lower equity risk premium assumed. Our TP includes a 6% ESG premium.

Source: RHB Research - 15 Oct 2024