Investment Highlights
Considerable improvement in ROE profile. CIMB’s ROE is one of the industry’s best, with the Group consistently reporting values of >11% in the last three quarters. This comes at the tail end of the Group’s Forward23+ plans, where the Group has undertaken notable initiatives to improve its profitability profile and overall attractiveness to investors.
These include: (i) Restructuring several problematic loan segments while growing more higher-quality ones (particularly consumer), (ii) Improving asset quality and provisioning profile, (iii) Undergoing a considerable kitchen-sinking exercise to improve cost structure, (iv) Amping up regional presence, particularly in Indonesia and Singapore (the Group is also hinting at solid progress in its digital assets based in Vietnam and the Philippines), (v) Streamlining capital structure, and (vi) Increasing sustainable dividend payout.
CIMB thinks there’s still room for further improvement by (i) Turning around its Thai operations (progress has been made, but the project is far from completion), (ii) Shifting the focus back to fee income by amping its investment banking franchise, (iii) Further kitchen-sinking exercises, though further cost structure improvements may be more muted, and (iv) Further expanding its Digital Asset contributions. We await CIMB’s next multi-year plan for clearer details on their future initiatives.
Proxy to the fast-growing Indonesian market. CIMB stands out as the Malaysian bank with the highest exposure to the Indonesian market. CIMB Niaga, which manages the Group’s Indonesian operations, is doing well for many reasons: (i) Its NIMs are far higher than the Group's (given their far superior CASA ratio), (ii) Its growing loans and deposits (particularly CASA), (iii) NPL sales provide a boost to NOII.
As a result, CIMB Niaga’s ROE is very high, which provides an overall uplift to the broader Group’s figures. The main concern is asset quality, though this has considerably improved from a couple of years back, following a massive restructuring in the loan book and impairment management via NPL sales.
CIMB Thai is undergoing restructuring and will likely be the focus of the next multi-year plan. CIMB Thai’s operations have dragged overall performance, notably on loan growth. Despite some success with its wealth management business, CIMB Thai still faces issues, most notably in its autoloan and commercial portfolio. The Thai environment is also very challenging, with larger Thai banks reporting ROEs of low 8-9%.
Management intends to act on present issues. This could imply a large restructuring in Thai operations or shifting capital to other areas with better ROE-generating potential. Further details will only emerge as part of CIMB’s next multi-year plan – though we are optimistic of positive results, given management’s past track record of success.
Stronger asset quality and provisioning profile. CIMB’s efforts to improve its asset quality have borne fruit. Its current GIL ratio is 2.34%, well below its pre-pandemic range of 2.90-3.40%. The Group has undergone a drastic loan book restructuring in previous years, reducing exposure to problematic segments or revamping it entirely. We’ve seen considerable improvement in all geographical segments.
Aside from GIL ratio, CIMB is boasting considerable improvement in other metrics: (i) Its LLC has risen to >100%, from the pre-pandemic range of 70-80%, (ii) Its base NCC has been reduced to the 30-40bps level, which is considered healthy for its current GIL ratio level and high exposure to the Indonesian market. In addition to this, the Group is actively looking out for more levers to improve its asset quality (most notably, more consistency in NPL sales).
Valuation & Recommendation
We initiate coverage on CIMB with a BUY recommendation and a target price of RM9.28 based on an FY25F PBV of 1.31x GGM-PBV valuation. (GGM Assumptions: FY25F ROE of 11.3%, LTG of 4.0%, & COE of 9.6%.)
We favour CIMB for its (i) Considerable improvements to ROE profile, (ii) Exposure to the fast-growing Indonesian market, (iii) Possible future revamp to underperforming CIMB Thai operations, reducing the drag to ROE, (iv) Superior asset quality and provisioning profile post-pandemic.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.390206 | 4.425718 |
| EUR | 5.008717 | 5.015095 |
| CNY | 0.603029 | 0.603828 |
| HKD | 0.565660 | 0.569770 |
| SGD | 3.345779 | 3.370205 |