Bank CIMB Niaga: Steady Growth and Attractive Valuation Drive Investment Appeal

Date: October 20, 2024
Broker: PT Maybank Sekuritas Indonesia

Overview

Bank CIMB Niaga (BNGA) is the sixth-largest bank in Indonesia by asset size. It offers a balanced mix of retail and wholesale banking services, with a strong focus on consumer and SME (Small and Medium Enterprises) lending. Established in 1955, the bank has steadily grown its retail segment, supported by a conservative approach to lending and a focus on quality growth. CIMB Group Holdings Berhad holds a major share in the bank.

Investment Thesis

Maybank initiates coverage of Bank CIMB Niaga with a “BUY” rating and a target price (TP) of IDR 2,400, representing a 26% upside from its current share price of IDR 1,910. The investment case is based on steady growth, prudent management, and attractive dividend yields.

Financial Performance

• FY22 Core Net Profit: IDR 5,042 billion
• FY23 Core Net Profit: IDR 6,474 billion
• Forecasted Net Profit Growth: 10.5% CAGR from FY23 to FY26
• ROE (Return on Equity): Expected to improve, with FY24-26 averages projected at 15.5%
• Net Dividend Yield: 6.4% for FY24, expected to increase to 7.1% in FY25 and 8.3% in FY26

Growth Drivers

Retail and SME Lending

BNGA’s retail lending grew by 6.9% YoY in 1H24, outpacing overall loan growth. The main contributors to this growth are auto and SME loans. Its focus on collateralized lending (like auto loans) helps maintain lower credit costs, while SME lending benefits from careful client selection.

Syariah Banking

BNGA’s Syariah business is the second largest in Indonesia, benefiting from the growing demand for Islamic banking products. The bank sees substantial potential in this segment, particularly given Indonesia’s large Muslim population.

Conservative Approach to Lending

BNGA has focused on quality over quantity, resulting in consistent, conservative growth. It has successfully reduced its loans-at-risk (LAR) and Non-Performing Loans (NPLs). By 1H24, LAR and NPLs were 10.2% and 2.1%, respectively, compared to 13.3% and 2.5% in 1H23. The bank forecasts that LAR will decline to 6.2% by FY25.

Funding and Digital Innovation

BNGA has been successful in growing its low-cost Current Account and Savings Account (CASA) deposits, which make up 62.6% of total deposits. This focus on retail CASA helps reduce funding costs, making the bank’s funding base more stable and less sensitive to interest rate changes.

The bank’s digital transformation strategy has also been a key focus. With 3.3 million mobile app users, BNGA has prioritized streamlining banking services, leading to over 90% of transactions being branchless.

Macroeconomic Outlook

Indonesia’s stabilizing inflation and improving consumer confidence create favorable conditions for banking sector growth. BNGA stands to benefit from expected interest rate cuts, which would reduce funding costs and potentially expand Net Interest Margins (NIM).

Financial Metrics & Forecasts

• Net Interest Margin (NIM): Projected to expand as funding costs decrease. FY24 NIM target set at 4.28%, expected to grow further by FY25.
• Loan Growth: Forecasted to be 6% in FY24, accelerating to 8% and 9% in FY25 and FY26, respectively.
• ROE & Dividend Payout: Forecasted to reach 16.4% by FY26, with a sustainable dividend payout ratio of 50%.

Valuation and Risks

Valuation

• Price-to-Book (P/B) Ratio: BNGA is currently trading at 0.87x FY25E P/BV, while Maybank’s target price is based on a 1.08x FY25E P/BV.
• Cost of Equity: Estimated at 13.5%, with a risk-free rate of 6.50%.

Risks

Key risks include:

1. Weaker Economic Growth: Could lead to a slowdown in lending and a potential deterioration in asset quality.
2. Increased Funding Competition: Tightening liquidity may raise funding costs.
3. Regulatory Intervention: Upcoming requirements to separate the Syariah business could affect short-term growth.
4. Low Free Float: The low share free float (7.5%) could lead to heightened price volatility.

Historical Context and Key Developments

• 1955: Established as PT Bank Niaga.
• 1989: IPO and listing on Bursa Efek Indonesia.
• 2002: Acquisition by CIMB Group Holdings Berhad.
• 2008: Merger with Lippo Bank, expanding network across the ASEAN region.
• 2022: Recognition in the ASEAN Corporate Governance Scorecard.

Management and Strategic Direction

BNGA’s management team has extensive experience in banking, finance, and digital innovation. Their strategic direction focuses on maintaining a healthy balance between growth and asset quality, supporting digital transformation, and capitalizing on the growth potential of Syariah banking.