This article first appeared in The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023

The last few years have thrown numerous challenges at the banking industry, including the need to overcome net interest margin (NIM) compressions that resulted from a deposit war shoring up the cost of funds when the world swung from “lower for longer” interest rates to “higher for longer”.

CIMB Group Holdings Bhd — this year’s winner of The Edge Billion Ringgit Club (BRC) highest returns to shareholders over three years in the financial services category for companies above RM10 billion market capitalisation — not only navigated the challenges, but also edged out peers with regard to shareholder returns.

The banking group’s adjusted shareholder return during the BRC corporate awards evaluation period of March 31, 2020 to March 31, 2023 was a three-year compound annual growth rate of 18% — just ahead of another peer to secure the win, with most other peers showing three-year CAGR of between 9% and 14%.

CIMB’s share price has risen steadily since hitting a five-year low of RM2.97 on Nov 4, 2020. This trend is similar to that at other local banks, which also saw a steady climb in November as markets turned more positive on expectations of a better economic outlook as countries around the globe began administering Covid-19 vaccines.

Between March 31, 2020 and March 31, 2023, CIMB’s share price gained about 64% from RM3.23 to RM5.31. Since March 31 this year, the share price has trended lower to reach RM4.81 on June 2 but has since rebounded. It closed at RM5.69 on Oct 25.

The banking group’s dividends have also been consistent on a per-share basis, with the exception of FY2020. In FY2020, dividend per share amounted only to 4.8 sen — no surprise given how the banking sector was conserving capital during the Covid-19 pandemic. In FY2021, the bank doled out 23 sen per share to shareholders, then 26 sen in FY2022. Between FY2020 and FY2022, CIMB’s adjusted weighted return on equity came up to a commendable 7.15% per annum over three years.

This year, the banking group’s net profit for the cumulative six months ended June 30, 2023 has increased by 26% to RM3.42 billion, or 32.05 sen per share, from RM2.71 billion, or 26.26 sen. Revenue for the first half of 2023 totalled RM10.33 billion compared with RM9.62 billion a year ago. Analysts say that the 1H2023 earnings were within expectations, accounting for slightly more than half of consensus projection.

The stronger earnings were attributed to improved non-interest income and lower total provisions, according to AmInvestment Bank Research. Non-interest income increased by 32% year on year, driven by stronger income from treasury and markets, foreign exchange gains and gains booked in from the sale of impaired loans in Indonesia and Thailand. Gross loan growth grew 8.3% y-o-y in 2Q2023 compared to 7.4% y-o-y in 1Q2023 from the drawdown of wholesale banking loans.

The banking group also saw strong deposit growth, with total deposits increasing 4% quarter on quarter and 9% y-o-y. However, net interest margin eased two basis points on a q-o-q basis and 23bps y-o-y.

“CIMB revised down its NIM guidance to 15-20bps NIM compression vs a 10-15bps decline previously. That said, 1H2023 NIM of 2.26% was 25bps lower vs the 2022 NIM of 2.51%, which could imply some NIM recovery in 2H. Already, CIMB had lowered its deposit campaign rates by 5bps in July and August, without materially impacting volumes,” notes RHB Research in a recent report.

RHB Research also notes that the banking group’s asset quality is contained despite gross impaired loans ticking up 7% q-o-q. It said that the gross impaired loan ratio and loan loss coverage stood at 3.3% and 92.9% respectively.

“Covid-19-related overlays at end-2022 were RM2 billion, of which RM1.4 billion relates to Malaysia. The bulk of this has been reallocated and management continues to guide that it intends to retain as much of its overlays as possible due to the current macroeconomic uncertainties, and maintain LLC (loan life coverage) at comfortable levels,” it said.

TA Securities is of the view that CIMB Holdings’ 1H2023 financial performance demonstrates improving momentum from its non-interest income, loan growth and healthy asset quality. It added that on account of the healthy growth trajectory, the banking group is on track to exceed some of its FY2023 targets.

“As such, management revised upwards some of its guidance for FY2023, such as loans to grow by 6%-7% (from 5%-6%), and loan loss charge to improve to 40-45bps (from 45-55bps). NIM pressure is also expected to subside.

“Despite the optimism, management maintains a cautious stance, given global headwinds, elevated interest rates and heightened deposit competition. Earnings pressure could come from higher costs due to technology and operational investments. CIMB will also focus on strengthening the CASA (current account savings account) and deposit franchise to arrest further NIM compression,” it said.

At the time of writing, TA Securities had a “buy” call on the banking group with a target price of RM6.40. AmInvestment also kept its “buy” call on the bank with a fair value of RM6.70, adding that it likes the bank due to its attractive valuation, trading at 0.8 times FY2024 book.

CIMB’s stellar share price performance provided opportunities for largest shareholder, Khazanah Nasional Bhd, to cash in on part of its holdings and recycle capital into new assets. Khazanah raised RM535.5 million from placing out 105 million shares at RM5.10 apiece in April 2022 and another RM362.7 million from selling 62 million shares or 0.58% stake, likely at RM5.85 per share, in September this year.

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