While the operating environment remains challenging for CIMB Group Holdings (CIMB MK), much of the negatives have been built into forecasts and there is room for credit costs to surprise positively, said Maybank Investment Bank (Maybank IB) today (Oct 25).
The investment bank’s FY23/24E ROE estimates lag management’s targets and there is room for a re-rating should these targets be met. At this juncture, Maybank IB maintains a BUY call on CIMB with an unchanged TP of MYR6.50 (FY24E PBV target of 1.0x, ROE: 10%).
Challenging environment built into forecasts
The operating environment remains fairly challenging amid moderate loan growth and likely slower HoH non-interest income growth in 2H23, in their view. Nevertheless, Maybank IB believes that much of these challenges have been built into their forecasts. Positively, net interest margins appear to have troughed while there is room for credit cost to surprise positively amid stable asset quality.
Room for credit costs to surprise positively
The outlook for impaired loans remains relatively benign, though management remains cautious amid headwinds in global macro conditions.
COVID-related overlays in Malaysia have predominantly been reallocated, but remain largely intact in Thailand and Indonesia.
Management is comfortable with its provision levels for loans under repayment assistance, more so for the corporate/commercial loans. There is room, Maybank IB believes, for credit cost to surprise positively. Their current credit cost assumption of 50bps for FY23E is at the high end of management’s 40-50bps guidance, while their 40bps estimate for FY24/25E is also a fairly elevated assumption.
Room for re-rating if ROEs surpass expectations
Management remains comfortable with and committed to its ROE target of 10.2%-11% for FY23 (1H23: 10.6%). Our FY23E ROE of 9.8% is lagging management’s target. Moving into FY24, management has an ROE target of 11.5-12.5%, for which Maybank IB’s estimate of 10% is also lagging.
“Positive surprises here would undoubtedly provide the basis for a valuation upgrade for the stock,” it added.
Books Still Sound
Meanwhile, Kenanga Research (Kenanga) maintains a GGM-derived PBV TP of RM6.30 (COE: 11.2%, TG:3.5%, ROE: 10.5%) and Outperfom call as they anticipate CIMB to remain strong with regards to its earnings delivery and books management.
The most prominent risk lies with unexpected impairments which Kenanga reckons could be low in the present climate.
Meanwhile, other guidance may be on track to meet expectations.
Kenanga’s assumptions are unchanged post-briefing. CIMB is one of their 4QCY23 top picks.
CIMB hosted a sell-side 3QFY23 pre-results briefing yesterday (Oct 24) with key takeaways are as follows:
1. Loan growth likely as anticipated – The 6%-7% guidance on loan growth will likely be met on the group’s expectation that moderate growth will be protracted from supportive economic conditions, albeit likely not as vibrant. Kenanga opines the group’s target may be conservative having reported a 3.3% QoQ loan growth and 8.3% YoY.
2. NIMs pressure to subside – CIMB opined that the worst is over with regards to domestic deposits competition, with the group having progressively trimmed product rates to sustain margins. On the other hand, Thailand and Indonesian operations may incur higher funding costs as a reaction to the competitive climate there.
Offsetting anticipated recoveries in Malaysia, CIMB may still experience a net margin compression on a group level (FY23 target at 5−10 bps decline).
3. Forex volatility not a concern – Amidst ongoing fluctuations of the ringgit, the group believed the overall impact may be contained as volatility could still drive trading and forex gains. Mitigating this may be overall lower fees, which may also experience sequential decline given 2QFY23’s lumpier recording of NPL sales as well as certain wholesale fee income.
4. Higher expenses likely in tandem with top line – The group continued to expect operating costs to further rise. Notwithstanding the recent union wage adjustments from collective agreements, CIMB has also been investing more heavily into marketing and establishment costs to keep up with stronger business activities.
That said, cost-income ratio may still remain flattish at c.46.5% per last guidance, indicating cost control is still in check.
5. Unworried on asset quality – There appears to be fewer signals which would trigger the group to further tighten its asset quality management. As business climate normalises (ex-Covid relief measures), GIL levels are likely to remain contained with overlays still providing sufficient buffers against unexpected headwinds.
Additionally, the group may not be exposed to recently troubled names in the airline industry, which could reduce the likelihood of unexpected topping up of provisions.
Forecast – Post-update, Kenanga maintains their FY23F/FY24F numbers. Maintain OUTPERFORM and TP of RM6.30 being based upon an unchanged GGM-derived FY24F PBV of 0.92x (COE: 11.2%, TG: 3.5%, ROE: 10.5%). Kenanga 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. The group’s recent return to double-digit ROE delivery could be a clarion call to past investors as well.
Risks to Kenaga’s call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loan growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to the OPR.
