Why is CIMB group undervalued?

CGS international research issued a report today. They mentioned CIMB Group Holdings is deemed undervalued with a CY25F P/E of 8.4x, presenting potential re-rating catalysts such as an increase in dividend payout ratio, expansion of ROE, and above-sector loan growth. CIMB’s substantial exposure to Indonesia’s rapidly growing banking industry is seen as a positive, with expected loan growth of 11-12% for Indonesian banks in 2024F.

The discount in CIMB’s valuation compared to the sector is expected to narrow further. CIMB has historically traded below sector valuations, largely due to its gross impaired loan ratio exceeding the sector average. However, the bank’s gross impaired loan ratio has shown faster improvement over the past three years compared to sector trends. Consequently, the gap between CIMB’s gross impaired loan ratio and the sector average decreased from 1.7% pts at end-2020 to 1.2% pts at end-2023.

As the gap in gross impaired loan ratios continues to narrow, CIMB’s valuation discount relative to the sector average is anticipated to decrease further, especially with an expected decline in its gross impaired loan ratio in FY24-26F.

Higher dividend payouts are expected in FY25-26F, with CIMB aiming for a 55% dividend payout ratio in FY24F (in line with FY23, excluding special dividends) and an increased assumed payout ratio of 60% in FY25-26F.

This increase is deemed achievable within the bank’s dividend policy range of 40-60% payout, supported by its target common equity Tier-1 (CET1) capital ratio of at least 13.5% by end-Dec 24F (expected around 14% in FY24-26F), aligning with similar practices among other Malaysian banks with comparable CET1 capital ratios, such as Bank Islam.