CIMB gives a briefing on its upcoming 2Q/22 performance, for asset quality, it is tracking better than expected, Jun-22, RA loans have reduced to 4-4.5% of gross loans on a group level. (Apr-22: 5%, Pre-pandemic: 3%). Notably, Malaysian consumer loans have declined to 2% (Apr-22: 4%), while Malaysian commercial loans have declined to 6% (Apr-22: 7%). The % of RA loans with missed payments is relatively benign, with the uptick seen in Apr-22 due to Raya having already gone down.
So far, MIDF sees vulnerable sectors that have not seen any major deterioration or change in outlook so far. The impact of the poor macroeconomic condition is expected to take place towards end-2022 or early-2023. These sectors, coupled with regional SME segments, will be most likely to feel the heaviest pinch in the months ahead. Credit cost guidance of 60-70bps is maintained for now. Net overlays are to increase in 2Q22, with bigger adjustments made through MEF provisions, despite asset quality being better than expected. Minor overlays will be primarily made to consumer and business banking buckets.
No lumpy provisions are expected, given that management deems big corporate provisioning to be sufficient, as well as
their outlook still being intact. Although CIMB would prefer to hold maintain MEFs for longer, BNM requirements will likely
force major overlay writeback in 2023. This is if BNM continues to maintain its monthly missed loan payment rate at a low
level.
CIMB guides for NOII improvements on a sequential quarter basis, on the back of improved fee income and loan recovery (under the other operating income section). Additionally, the Group has taken advantage of switching to higher-yielding AC and FVOCI instruments in 2Q22, more so than 1Q22. The above drivers are expected to continue to be dragged by weakness in trading and FX lines (as FVTPL and FVOCI continue to be negatively impacted). The IB segment’s poor outlook in 2H22 remains. COF across regions. Only Singapore is seeing rising COF pressure following the earlier interest rate hikes. Interest spread has begun to narrow following the normalisation of deposit rates.
In contrast, rest of the group’s regions remain relatively benign. Malaysia has seen slight buckets of competition in 12-24-
month deposit category, though rates remain rational. Indonesia’s economic outlook remains robust, with excellent
demand and CIMB Niaga’s aggressive CASA growth strategy functioning well in the low interest rate environment.
Lazada has emerged as an investor in TnG Digital’s recent funding round. No major revaluation gain is expected this time around. CIMB is confident that this strategic stake will benefit both parties, allowing TnG to leverage on Lazada’s commercial ecosystem. TnG Sdn Bhd is the parent of TnG Digital. The former is in turn wholly-owned by CIMB. Previously, Bow Wave capital management (a US-based private equity firm) and AIA Bhd invested roughly USD$50m and USD$25m respectively. Capital. Capital outlook remains good, despite CIMB’s cautious outlook and negative FVOCI movements in 2Q22. (1Q22’s CET-1: 14.5%). As a result, the group intends to dial down their dividend reinvestment scheme’s (DRS) electable portion, subject to BNM approval.
MIDF reduces its forecast for FY24 by -2.7% as it believes initial NIM forecasts were too optimistic. Slight upticks in credit costs forecasts due to poor macroeconomic outlook are offset by positive effects of factoring 3 +25bps OPR hikes in CY22 and 2 in CY23 (as opposed to initial expectations of 2 in CY22 and 3 in CY23).
CIMB has a number of issues. It still faces sub-par asset quality and high loan credit costs, though heavy pre-emptive provisioning should stifle any major concerns. A FVOCI reserve already in the negative is unable to provide much buffer to negative bond yield movements affecting its high concentration of FVTPL holdings (~26%). Finally, given its high CASA ratio of ~43%, the Group may feel the effects of CASA rundown a bit harder than its peers.
Nevertheless, CIMB Niaga is performing well, especially as Indonesia maintains its ultra-low interest rate environment.
Positive surprises in the asset quality department are possible, given RA loan progression seems to be better than
management’s assumptions. Loan growth, portfolio rebalancing, and cost management seem to be working in CIMB’s
favour as well.
MIDF maintains its BUY call with an unchanged TP of RM6.14, using an unchanged PBV of 0.95x FY23 BVPS, based on a
FY23 ROE of 9.4%. We believe this is warranted as the Group gearing towards an improved ROE profile from pre-pandemic times following its recent loan book reshuffling and kitchen-sinking exercises
