This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

CIMB Group Holdings Bhd’s (KL:CIMB) new group CEO, Muhammad Novan Amirudin, has come on board at a time when the country’s second-largest banking group’s shares have been rallying.

CIMB’s share price has gained a solid 43% over the last 12 months and 20.1% year to date, to close at RM6.95 on June 5, for a market capitalisation of RM74.34 billion. It reached an all-time high of RM7 on July 4, based on Bloomberg data.

Novan, formerly co-CEO of group wholesale banking as well as CEO of CIMB Investment Bank Bhd, officially took over from Datuk Abdul Rahman Ahmad on July 1.

The stock has been on a broad uptrend since hitting a multi-year low of RM2.48 in October 2020.

The main reason for the stock’s strong performance is the steady improvement in the bank’s return on equity (ROE), analysts say. After having slumped to 2.1% in the financial year ended Dec 31, 2020 (FY2020) — the year it made Covid-19 provisions and impairments for certain oil and gas accounts — its ROE rebounded strongly to 10.7% in FY2023.

Analysts whom The Edge spoke to say CIMB is likely to meet or come close to meeting the lower end of its targeted ROE range of 11.5% to 12.5% by end-FY2024. This was a key target set by the bank under its five-year Forward23+ strategic plan, steered by Abdul Rahman, which comes to an end this year.

“The stock price has been reflecting the ROE improvement. CIMB has been meeting its key [interim] targets, showing asset quality improvement, costs are under control and it paid a special dividend in 4QFY2023. So, all this has actually helped,” Tushar Mohata, a banking analyst at Nomura Research, tells The Edge.

“CIMB’s valuation was cheaper than its larger peers Malayan Banking Bhd (Maybank) (KL:MAYBANK) and Public Bank Bhd (KL:PBBANK) — and still remains the cheapest now, trading at a price-to-book multiple of about one time. So, that’s also why this stock has rallied more than [others].”

Bloomberg data shows that of 18 research houses that actively track CIMB’s performance, all except one — Hong Leong Investment Bank (HLIB) Research — have a positive stock recommendation. The average 12-month target price was RM7.43, which suggests further upside from its June 5 closing of RM6.95.

Nomura has a RM8 target price on the stock. “If CIMB continues its ROE trajectory and reaches 11.5% this year, then a fair price-to-book multiple should be closer to around 1.2 times, based on Malaysian banks’ trading averages. So, there is still some upside,” Mohata says.

Nomura, along with several other research houses including RHB Research, has CIMB as one of its top banking picks.

The possibility of special dividends this year, as a capital optimisation measure, is also drawing investor interest. “This [possibility] is due to CIMB’s CET-1 capital ratio being nearly at the 15% level, well above the 13% level of its peers. When considering a new sustainable dividend policy and further RWA (risk-weighted asset) optimisation, however, we may have to wait until the rollout of the next multi-year plan, as it must be deliberated upon in tandem with growth expectations,” MIDF Research says in a June 4 note.

HLIB Research banking analyst Chan Jit Hoong is maintaining his “hold” call on the stock. “It’s hard to recommend a ‘buy’ at this juncture because the stock has done so well already. While it’s not super pricey, it’s also not that cheap at one standard deviation above its price-to-book five-year mean,” he tells The Edge.

Meanwhile, there is anticipation about the bank’s next long-term strategy that Novan and his team will carve out. This is likely to be in the planning now and take effect only next year once the Forward23+ plan ends.

“The overall metric for the bank’s performance is likely to remain ROE improvement, or sustainable ROE improvement,” says Nomura’s Mohata.

“There is likely to be a play on the bank’s strengths in Malaysia — basically, capitalise on its strengths and gain more market share. In Thailand, possibly work towards a [sustainable] turnaround because earnings there have been volatile. And, in Indonesia, capitalise on the market’s [economic] growth. On the whole, work towards deriving good non-interest income (NOII) growth from all its markets.

“There will also be a big focus on sustainability because CIMB, at least in the Malaysian banking space, is regarded as a leader in terms of its sustainability agenda, progress and targets.”

He expects CIMB’s net profit to grow about 15% year on year to RM8.01 billion this year, from RM6.98 billion.

HLIB Research’s Chan says one area in particular that Novan will have to focus on is maintaining the sustainability of its NOII business. NOII has been strong of late and was one of the main reasons CIMB’s 1QFY2024’s net profit — which grew 18% y-o-y and 13% quarter on quarter to about RM1.9 billion — came in slightly above analysts’ expectations.

“NOII can be very volatile, so that’s the only area I am a bit more concerned about. CIMB must try to continue to churn strong NOII in order for it to hit its ROE target this year,” he says.

“As for its asset quality, I don’t have many concerns, as the bank has de-risked its portfolio over the past three to five years. In addition, its loan-loss coverage now is above pre-pandemic levels.” 

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