Comprehensive Financial Analysis of CIMB Group Holdings
Maybank Investment Bank Berhad
November 6, 2024
Introduction
In this detailed report, we delve into the financial performance and future prospects of CIMB Group Holdings, exploring their net interest margins, loan growth, non-interest income, and asset quality, among other aspects. Our analysis is based on recent meetings and upcoming announcements, providing a thorough understanding of the group’s position and strategy.
3Q24 Earnings Outlook
Following a recent meeting, our general takeaway is that CIMB Group’s 3Q24 earnings, set to be announced on November 28, are likely to be decent. This is underpinned by ongoing sequential expansion in net interest margins (NIM) and modest credit cost. Despite a challenging 4Q24 forecast due to deposit competition and weaker non-interest income (NOII), our forecasts remain unchanged with a FY24E Return on Equity (ROE) of 11.1%, which is at the lower end of management’s target. We maintain a BUY rating with an unchanged target price (TP) of MYR9.20, pegged to a FY25E price-to-book value (PBV) of 1.3x (FY25E ROE: 11.2%).
Net Interest Margins (NIM)
CIMB is currently enjoying the benefits of having lowered its domestic funding cost in FY23, resulting in sequential improvements in NIM over the past two quarters. Domestic NIMs are likely to have expanded further quarter-on-quarter (QoQ), albeit to a milder extent. In Singapore, a marginal margin uplift is expected from the downward repricing of some of its liabilities. While NIMs in Thailand have been stable, those in Indonesia have been under pressure, declining by 15bps QoQ. Overall, a net sequential NIM improvement into 3Q24 is expected. However, maintaining this momentum into 4Q24 will be challenging as the effects of FY23 rate cuts diminish and seasonal competition sets in domestically.
Loan Growth
Expectations since 2Q24 have been for loan growth, which was 4.2% year-on-year (YoY) at the end of June 2024, to trail management’s target of 5-7%. This is a conscious move to focus on higher-yielding assets to preserve margins. Management has also been tactically managing its cost of funds by significantly reducing the volume of short-term wholesale deposits. While maintaining market share in corporate fixed deposits, they have been willing to lose some market share on wholesale current account and savings account (CASA), where some banks have been paying up to gain market position.
Non-Interest Income (NOII)
In the first half of 2024 (1H24), CIMB saw its NOII rise by 14% YoY, with a 6% YoY growth in fee income and a 20% YoY jump in investment income/forex. 3Q24 was also a decent quarter, likely experiencing a sequential pick-up. However, sustaining this momentum into 4Q24 is expected to be challenging.
Asset Quality
Asset quality has been stable with no visible signs of stress. Forward indicators on the retail and small and medium-sized enterprises (SME) fronts are stable to improving, with no indications of increased risk on the corporate front. Asset quality in the Philippines operations is stable to improving, and management is comfortable with the level of risk-taking there. Asset quality in Thailand is stabilizing, with credit cost remaining elevated but trending down slightly. The loan loss charge in 2Q24 was a mild 20bps compared to 35bps in 1Q24 and is likely to remain modest into 3Q24. Given that the average in 1H24 was 28bps against management’s guidance of 30-40bps for the year, credit cost could potentially surprise positively.
CIMB Thai Review
CIMB Thai has been facing challenges in the consumer finance space, generating low ROEs of about 5-6%. However, it continues to perform well in the corporate/wholesale business, supported by CIMB Group’s ASEAN franchise. Management is currently reviewing the bank’s business model and proposition. A turnaround here would significantly support the group’s overall growth strategy.
Capital Base
Basel III’s operational risk capital framework, set to be implemented from January 2025, may have a marginal negative impact on CIMB Group’s Common Equity Tier 1 (CET1) ratio, which stood at 14.5% at the end of June 2024. However, the impact is expected to be manageable and will not affect the group’s guided 55% dividend payout policy.
Risk Statement
As the second-largest domestic financial institution in Malaysia in terms of asset size, any economic slowdown in the country would impact the group’s operating performance. Additionally, regional exposures in key markets such as Indonesia, Thailand, and Singapore mean that economic volatility in these regions would affect overall operations. Further decreases in Indonesia’s interest rates could squeeze margins in the near term, while the weakening of the Indonesian Rupiah (IDR) could impact the translation of CIMB Niaga’s earnings.
Conclusion
Overall, CIMB Group Holdings is expected to deliver a decent performance in 3Q24, with ongoing improvements in NIM and stable asset quality. However, challenges remain in sustaining this momentum into 4Q24 due to deposit competition and weaker NOII. The group’s focus on higher-yielding assets and tactical management of funding costs will be crucial in navigating these challenges. Investors should keep an eye on the upcoming earnings announcement and management’s strategic decisions, especially regarding CIMB Thai, to gauge the group’s future prospects.
