This article first appeared in The Edge Malaysia Weekly on October 2, 2023 - October 8, 2023

A marked improvement in CIMB Group Holdings Bhd’s key financial metrics in recent times, especially its return on equity (ROE), has caught the attention of analysts and made it one of the top stock picks in the banking sector this year. It was one of only two local banking groups that turned in better-than-expected earnings in the second quarter, prompting several research houses to raise their earnings forecast and target prices for CIMB.

However, given the growing macroeconomic headwinds and expectations that interest rates are likely to stay at elevated levels for longer than initially thought, some wonder if CIMB can keep up its positive momentum. Its ROE, a key measure of profitability, improved significantly from 8.5% in FY2019 to 10.6% in 1HFY2023. It remains to be seen if CIMB can meet its target of 11.5% to 12.5% by FY2024, as set under its Forward23+ strategic plan.

A banking analyst tells The Edge that while CIMB’s transformation journey over the last 2½ years has been “impressive”, its ROE target seems ambitious given the external headwinds.

“We see that 2024 will be a challenging year for the overall banking sector as, at this point, it is hard to see net interest margin (NIM) expanding in a sustainable way due to the [intense] competition for deposits, rising cost of funds and increasing cost of living. These headwinds are not within their control, as such, we think CIMB’s 11.5% to 12.5% ROE target will be hard to achieve,” he says.

He also points out that it will be difficult for CIMB to sustain a double-digit ROE in the current economic environment, especially with the bank’s recent sizeable earnings support from non-interest income (NOII).

NOII, which can be derived from loan underwriting fees, commissions from trade facilities, trading gains from fixed income and higher claims income,among others, tends to be volatile.

Nevertheless, the analyst reckons that CIMB’s diversified geographical portfolio — it has a presence in all Asean markets except Myanmar and Laos — will help mitigate the headwinds faced in the Malaysian banking sector. Its biggest markets outside of Malaysia are Indonesia, Singapore and Thailand.

“CIMB has been working on strengthening its regional markets, which is reflected in its current financial results. But, if it is not doing anything new, I think its current share price reflects the current performance,” he adds.

This is not unique to CIMB. In a Sept 15 report, Hong Leong Investment Bank (HLIB) Research, which has a neutral stance on the sector, points out that most of the banking stocks have had a good run in their share prices over the last five to six months and that there are no fresh positive catalysts to spur banking stocks significantly higher.

In 2QFY2023, CIMB’s net profit came in at RM1.77 billion, up 38.4% year on year and 7.8% quarter on quarter. This raised its 1HFY2023 earnings by 26.2% y-o-y to RM3.42 billion, which accounted for 53% of analysts’ consensus forecast for the full year.

Given the solid performance, CIMB raised its loan growth guidance for the year to 6%-7% from 5%-6% previously, while its credit cost expectation was lowered to 40-45 basis points from 45-55bps. As at 1HFY2023, its loan growth was 8.3% and credit cost was at 38bps.

The group also revised its NIM guidance for the year, expecting a larger compression of 15-20bps compared with 10-15bps previously.

Maybank Investment Bank Research raised its earnings forecast for CIMB by 2% a year for FY2023, FY2024 and FY2025, following the better-than-expected 2QFY2023 results.

“The positive surprise emanated from much stronger-than-expected NOII, which jumped 37% y-o-y in 2Q2023,” it said in an Aug 31 report.

It now expects a higher ROE of 9.8% for CIMB in FY2023 and 10% in FY2024, compared with an earlier estimate of 9.6% and 9.8% respectively. “Even so, our ROE forecast trails [CIMB] management’s target of 10.2% to 11% this year and 11.5 % to [12.5%] for FY2024,” says Maybank IB Research, which has a “buy” call and RM6.50 target price on the stock.

Indeed, it will be an uphill task for CIMB to meet its ROE goals given the challenges faced by the entire sector. HLIB Research, which has a “neutral” stance on the banking sector, sees the sector’s profit growing at a slower rate of 5% in FY2024 and 4% in FY2025, compared with an expected 13% this year. This is on the back of expectations that NIMs may not be able to recover meaningfully, NOII growth will decelerate and net credit charge write-backs are unlikely.

“Although fixed deposit (FD) competition is now benign and we anticipate NIMs to stabilise from 3Q2023 onwards, we believe a meaningful recovery from then on would be difficult, considering: (i) FD-CASA (current account savings account) substitution may further normalise down closer to pre-pandemic levels; (ii) the adoption of a standardised base rate for new retail floating-rate loans prevent banks from passing on higher funding costs to borrowers (only overnight policy rate or OPR is allowed to be transmitted). Besides, it [has] caused credit pricing in this space to be more competitive. Our channel checks suggest the effective mortgage rate in the market today is less than 4%, unlike the pre-pandemic level of more than 4%, despite the OPR reverting to 3%,” it says.

HLIB Research notes that the environmental, social and governance push to originate more green financing could also erode lending yields.

Bloomberg data show that 15 analysts have a “buy” call on CIMB’s stock and four have a “hold” recommendation. There were no “sell” calls. The average target price was RM6.33, which suggests an upside potential of 17% from its closing price of RM5.43 last Friday.

The share price has jumped 16.3% since June, hitting a high of RM5.62 on Sept 20. At last Friday’s closing price, CIMB had a market capitalisation of RM57.9 billion.

Kenanga Research has CIMB as one of its top picks in the banking sector. “Fundamentally, the stock is supported by its regional diversification, especially in terms of NOII, which most of its peers lack. CIMB’s return to double-digit ROE could be indicative of its prospects, led by better forward earnings growth (21% versus industry average of 10%) while offering attractive dividend yields (about 6%) in the medium term. The group’s return to double-digit ROE delivery could be a call back to past investors as well,” it said in a Sept 1 report. 

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