PETALING JAYA: CIMB Group
Holdings Bhd has the potential to post higher earnings, improve its return on equity and pay out higher dividends as it enjoys strong loan growth.
CGS International (CGSI) Research believes investors have not rightly priced in the growth prospects of CIMB’s Indonesian operations, where the banking sector is expected to enjoy a loan growth of about 11%-12% and a net interest margin (NIM) of above 5% this financial year (FY24), as compared to 4%-5% loan growth and NIM of about 2% in Malaysia.
“CIMB’s 92.5%-owned subsidiary in Indonesia, CIMB Niaga, contributed 27% to its FY23 pre-tax profit.
“We think a strong Indonesia exposure gives CIMB an added advantage versus its local peers.
“Yet, it trades below its comparable peers such as Malayan Banking Bhd (Maybank) and Public Bank Bhd.
“As such, we believe the above positive attribute has not been priced in,” the research house noted in a report on CIMB.
CGSI Research added that CIMB’s 2025 price earnings (PE) multiple of 8.4 times is lower than the sector average of 9.7 times.
In addition, its 2025 PE is significantly below Maybank’s 10.7 times and Public Bank’s 10.3 times.
It also deems CIMB’s 2024 price-to-book valuation (P/BV) of 0.96 times as compelling, as it is below the banking sector’s P/BV of 1.07 times, Maybank’s 1.27 times and Public Bank’s P/BV of 1.38 times.
The research house thinks CIMB’s lower valuation, compared to peers, is due to its higher gross impaired loan (GIL) ratio, but added the ratio has been improving at a faster pace over the past three years versus the trend for the sector.
“The gap between CIMB’s GIL ratio and that of the sector average has declined from 1.7% points at end-2020 to 1.2% points at end-2023.
“With the narrowing in the gap between CIMB’s and the sector’s GIL ratios, we expect the discount in CIMB’s valuation versus the sector’s average to reduce further in the longer term.
“This is especially when its GIL ratio trends downwards in FY24-FY26 as we expect,” CGSI Research added.
Another positive for CIMB’s valuation is the prospects of a high dividend payout ratio. CGSI Research expects a dividend payout of 55% for CIMB in FY24, on par with the level in FY23 (excluding the special dividend) and in line with the group’s guidance of 55%.
It, however, forecast the payout rate could hit 60% in FY25-FY26 if its common equity tier-one (CET1) capital ratio hits at least 13.5% by the end of this year.
Another plus for CIMB is its improving cost-to-income ratio (CIR), which slid from 55.5% in FY19 to 47% in FY22-FY23.
“Going forward, we project CIMB’s CIR to improve to 45.8% in FY24 and 44.8% in FY25 as we expect the growth in net interest income to resume in FY24, following a decline of 4.6% in FY23,” the research house said.
CGSI Research noted CIMB had also established a strong presence in the digital banking space and its stakes, Touch ’N Go Sdn Bhd (100%) and TNG Digital Sdn Bhd (45.2%), are posting higher incomes as annual transaction users jumped in FY23.Thus, the research house is projecting CIMB to post a 10.1% year-on-year (y-o-y) growth in net profit of RM7.68bil in FY24, on the back of a revenue growth of 8% y-o-y, helped by a 10.4% rise in net interest income and 3.1% rise in non-interest income.
CGSI Research has put a target price (TP) of RM8.60 a share on CIMB, which translates to an implied 2025 PE of 11 times.
“We see this as reasonable because it is lower than the implied 2025 PE of 11.7 times for our TP for Maybank and 12.7 times for Public Bank,” it said.
