CIMB Niaga’s 1QFY24 net profit was within expectations. Niaga has made headways in regaining its NIMs although we view the surprise interest rate hike by its central bank to possibly cause some near- term disruption. That said, its improving asset quality is an indication of its longer-term sustainability. We maintain our forecasts, GGM- derived TP of RM6.60 and MARKET PERFORM call for CIMB.

1QFY24 within expectations. CIMB’s 92.5%-owned CIMB Niaga (Niaga) earnings of IDR1.68b made up 25% of consensus full-year estimate.

YoY, 1QFY24 net interest income declined by 4% as diminished NIMs (4.28%, -42bps) from higher funding costs offset the gains from a higher loans base (+6%). Non-interest income also declined (-6%) as investment income normalised from the prior year’s high base. On the flipside, the group saw credit cost improving drastically at 77 bps (-74 bps) with reduced delinquency rates as income and repayment prospects recover. This led to 1QFY24 net profit to report at IDR1.68b (+6%).

QoQ, 1QFY24 total income rose by 15% as NIMs managed to report sequential improvements (+12bps) with more loans being repriced during the period in addition to better comparative loan recoveries and trading gains. On the flipside, credit cost more than doubled (+40bps) likely on targeted pre-emptive provisions. All in, 1QFY24 net earnings grew by 7%.

Niaga’s outlook. Niaga’s sequential earnings growth appears sustainable as the group is able to at last regain NIMs from more meaningful loan repricing opportunities. That said, the surprise 25bps rate hike by its central bank, Bank Indonesia may lead to further recalibration of profit rates in the near-term. Overall, the group is not deterred in achieving its initial NIMs target of 4.2%-4.4% for FY24. We may continue to see earnings to be uplifted by comparatively better provisioning needs as economic activity picks up within the country, with Niaga being evenly exposed between consumer retail and business portfolios.

Forecasts. Post Niaga’s results, we leave our earnings forecasts for CIMB unchanged for now, pending group-level earnings results to be released end-May 2024.

Maintain TP of RM6.60. Our TP is based on an unchanged GGM- derived FY25F PBV of 0.92x (COE: 11.2%, TG: 3.5%, ROE: 10.5%). We 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 of which most of its peers lacked. 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. That said, we believe its merits could have been fairly priced following the reemergence of foreign shareholders into Malaysian equities, stabilising CIMB’s risk-to-reward.

Maintain MARKET PERFORM.

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loan growth, (iii) better/worse-than-expected asset quality, (iv) slowdown in capital market activities, (v) currency fluctuations, and (vi) changes to the OPR.

Source: Kenanga Research - 2 May 2024