CIMB Niaga's 9MFY24 net profit was within expectations. Niaga is expecting funding cost pressures to subside following the recent cut in BI-Rate but is also consciously moving away from more intense competitive first-tier cities. The group had indicated for the spin-off listing of its syariah unit to be completed by 1QFY26. We maintain our forecasts, GGM-derived TP of RM7.60 and MARKET PERFORM call for CIMB.

9MFY24 within expectations. CIMB's 92.4%-owned CIMB Niaga (Niaga) earnings of IDR5.13b made up 76% of consensus full-year estimate.

YoY, 9MFY24 net interest income declined by 2% as NIMs continued to see pressure (4.19%, -47 bps) from higher funding costs which offset the gains from a higher loans base (+6%). Meanwhile, non-interest income was stable (+1%) as higher fee-based income was offset by softer investment performances. On the flipside, due to credit costs coming off to 82 bps (-28 bps) from a better asset quality environment, 9MFY24 net earnings closed at IDR5.13b (+5%).

QoQ, 3QFY24 total income was flattish similarly as the group enjoyed slightly stronger NOII results but felt strains on its fund-based income with NIMs still deteriorating (-17 bps). Net profit was also stagnant during this period.

Niaga's outlook. Arising from ongoing competition, Niaga opted to trim its FY24 NIM guidance from 4.2%-4.4% to 4.1%-4.2%, being in line with 9MFY24's performance. Lower funding cost is expected following Bank of Indonesia's 25 bps cut (to 6%) in Sep 2024, alleviating some stress from the market. On the other hand, the group looks to pivot to gain a stronger presence in second-tier cities where larger players are less present, allowing better pricing power for Niaga. This would be offset by a conscious step back from less profitable mortgage businesses in first-tier cities.

Further, Niaga's ROE guidance of 15%-16% was also trimmed, to 14.5%-15.0%. However, this revision is mainly on the back of the group now operating at a higher equity base following adjustments in other comprehensive income. Assuming equity levels had remained constant, 9MFY24 ROE would have reported 30 bps stronger.

With regards to the spin-off and listing of its syariah units, the group has earmarked 1QFY26 for completion. That said, final price and valuations are still uncertain, although the minimum threshold of IDR50t (c.RM1.4b) in asset value has been met.

Forecasts. Maintained.

Maintain MARKET PERFORM and TP of RM7.60. Our TP is based on an unchanged GGM-derived FY25F PBV of 1.05x (COE: 11.2%, TG: 3.5%, ROE: 11.5%). We also applied a 5% premium granted by CIMB's 4-star ESG ranking, thanks to its headways in green financing. CIMB's return to double-digit ROE could be indicative of its prospects while offering attractive dividend yields (c.6%) in the medium term. That said, its regional diversification now poses downside risks as seen in CIMB Niaga's lowering of NIM guidance as markets there are becoming unfavourable. Its current share price appears to have fully priced in a FY24 ROE of 11.5%, which we have applied in our valuation. We await the unveiling of its FY25 and onwards strategies before we reassess CIMB's medium-term trajectory.

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) changes in capital market activities, (v) currency fluctuations, and (vi) changes to the OPR.

Source: Kenanga Research - 1 Nov 2024