Still a rough road ahead for CIMB as headwinds persist
KUCHING: CIMB Group Holdings Bhd (CIMB) still faces challenges ahead as macro headwinds and cautious market sentiments persist.
“Revenue expansion is still a concern with normalising loans growth in Malaysia and Indonesia, thinning net interest margins ( NIMs) arising from deposit-led competition in Malaysia and shifts to a more conservative loans portfolio and still uncertain noninterest income trends.
“Potential policy action may be an additional drag on earnings,” AllianceDBS Research Sdn Bhd (AllianceDBS Research) said in a report.
“That said, asset quality is on a better footing while credit costs should stay at healthier levels. Current guidance indicates some earnings growth weakness with a lower returns on equity ( ROE) of nine to 9.5 per cent and costto-income ratio of 53 per cent for the financial year 2019 ( FY19),” it said.
Nevertheless, it pointed out that even with the cheaper valuations, there might still be downside risks to earnings.
“Growth should normalise in 2019, mostly coming from retail and SME loans; the group noted a target to disburse RM15bn in SME loans within the next two years and RM12 billion in retail loans to the B40 group in 2019 to 2020.
“In Indonesia, loans growth is expected to hover in the midsingle digit region, underpinned by mortgages, SME loans and some uptick in corporate loans ( spilled over from 2018) but partially dragged by a declining auto loans book (as part of CIMB Niaga’s business recalibration).
“As the group is more focused on preserving asset quality, the growth momentum is likely to be more measured. All in, CIMB is targeting a six per cent run rate for 2019,” the research team added.
Meanwhile, it noted that NIMs pressures are still there. It pointed out that NIMs are largely expected to fall, with CIMB guiding for a five to 10bps contraction in FY19.
“In Malaysia, elevated funding costs from persistently keen deposit competition will continue to pressure NIMs; this may be more acute in the second half 2019 ( 2H19) as the observation period for net stable funding ratio concludes in January 2020.
Aside from that, the research team noted that CIMB’s growth plans under its Forward23 strategy seem optimistic, with 2023 target KPIs of 45 per cent cost-to-income, 12 to 13 per cent ROE and 13 per cent CET-1 ratio at a net credit cost run rate of 40 to 50bps.
“Based on our estimates, this implies an average earnings CAGR north of 10 per cent over the next five years from its current FY18 level (excluding one- off gains).
“We think this is likely to be premised on a sustained recovery in capital markets and improvement in NIMs over the next five years,” it added.
Asset quality, on the other hand, remains on healthier footing.