CIMB GROUP. Underpriced for regional non-interest income capability BUY. Company report. (Maintained) Rationale for report: Company Visit BANKING

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1 Comany reort Rahel Huang Rationale for reort: Comany Visit BNKING CIMB GRUP (CIMB MK, CIMB.KL) 25 tober 22 Underried for regional non-interest inome aability BUY (Maintained) Prie Fair Value 52-week High/Low Key Changes Fair value EPS RM7.58 RM9.7 RM7.95/RM6.68 YE to De FY FY2F FY3F FY4F Total inome (RMmil),872. 2, , ,864.2 Core net rofit (RMmil) 4,3.8 4, , ,265.2 Core EPS (Sen) EPS growth (%) Consensus EPS (Sen) n/a DPS (Sen) BV/share (RM) PE (x) Div yield (%) P/BV (x) RE (%) Stok and Finanial Data Shares utstanding (million) 7,432.8 Market Ca (RMmil) 56,34.4 Book value (RM/share) 3.49 P/BV (x) 2.2 RE (%) 6.4 Major Shareholders Khazanah Nasional Bhd (28.%) Emloyees Provident Fund (2.4%) Free Float (%) 57. vg Daily Value (RMmil) 65.9 Prie erformane 3mth 6mth 2mth bsolute (%) Relative (%) ,75,555 Investment Highlights We are maintaining our BUY rating on CIMB Grou Holdings Bhd (CIMB), with a higher fair value of RM9.7/share (vs. RM8.7 reviously). We have rolled forward our base year to FY3. Thus, our new fair value is now based on an RE of 5.8% FY3F (vs. 5.7% FY2F) and an unhanged fair P/BV of 2.3x. CIMB has reaffirmed its grou ommon equity ratio of 8% as at end-june 22, but its aquisitions of a 6% stake in the Philiines Bank of Commere (BoC) and Royal Bank of Sotland (RBS) will shave off 35bs to 4bs. Thus, ro-forma grou ommon equity ratio was at ira 7.6% as at end-june 22. More imortantly, CIMB has also onfirmed that the omutation of its grou ommon equity ratio is already based on Bank Negara s more onservative onet aer issued in May 22. It hinted that aital levels are likely to be more than adequate with the otential sale of CIMB viva. The non-interest inome division remains wellsuorted by the markets division, a stronger bond market in Indonesia, as well as a ontinuing robust domesti bond market. Its Indonesian subsidiary CIMB Niaga s non-interest inome has risen by more than fivefold sine FY4, easily to more than RMbil on an annualised basis and is now estimated to ontribute 3% to grou non-interest inome for FY2F. From this, we estimate that the base gross interest inome for the grou is unlikely to dro to the re-25 level, say of RM.5bil in FY4. Reall this was before CIMB s full transformation into a universal bank. We would argue that the base ase non-interest inome should be at least RM2.5bil, given that CIMB Niaga is now likely to ontribute a minimum of RMbil in noninterest inome.a. ) M 6. (R 4.,36,64 In d e x P o in ts base non-interest inome level of RM2.5bil imlies a base RE of 2.9% FY3F (vs. our urrent foreast of 5.8%), net earnings of RM3.8bil (vs. our urrent foreast of RM4.7bil) and a base fair value of RM6.8/share FY3F CIMB FBM KLCI t the urrent share rie, this is riing in a noninterest inome level of RM3bil, whih is not far off from our estimated base of RM2.5bil. We maintain BUY on CIMB. We exet the following re-rating atalysts for CIMB:- (a) sustainability in non-interest inome; (b) better-than-exeted asset quality; () sale of CIMB viva. PP 2247/6/23 (3238)

2 CIMB Grou Holdings 25 tober 22 Leverage Ratio TBLE : BNK NEGR TIMELINE bservatory eriod reorting s of January 29 Standard in fore Minimum ommon equity aital ratio 3.5% 4.% 4.5% 4.5% 4.5% 4.5% 4.5% Caital Conservation Buffer.625%.25%.875% 2.5% Minimum Common Equity Caital lus onservation buffer 3.5% 4.% 4.5% 5.25% 5.75% 6.375% 7.% Minimum Tier Caital 4.5% 5.5% 6.% 6.% 6.% 6.% 6.% Minimum Tier lus onservation buffer 4.5% 5.5% 6.% 6.625% 7.25% 7.825% 8.5% Minimum total aital 8.% 8.% 8.% 8.% 8.% 8.% 8.% Minimum total aital lus onservation buffer 8.% 8.% 8.% 8.625% 9.25% 9.875%.5% Caital instruments that no longer qualify as non-ore Tier aital or Tier 2 aital Phased out over year horizon beginning 23 Liquidity overage ratio bservation eriod reorting Standard in fore Net stable funding ratio bservation eriod reorting Note: ll dates as of January unless stated. Shading indiates transition eriod Banking institutions will also be required to submit to Bank Negara Malaysia alulations of their BSEL III aital ositions in during the observation eriod in 22 Standard in fore Soure: Comany / mresearh GRUP CMMN EQUITY RTI WITHIN CMFRTBLE RNGE Grou ommon equity ratio of 8% within omfortable range CIMB has reaffirmed its grou ommon equity ratio at 8% as at end-june 22. If assuming omletion of its aquisitions of a 6% stake in the Philiines Bank of Commere (BoC) and Royal Bank of Sotland (RBS), this will shave off another 35bs to 4bs. Thus, the ro-forma grou ommon equity ratio was at ira 7.6% as at end-june 22. (Note that the grou usually reorts bank aital ratios, and not the grou aital ratios, in the quarterly announements). We estimate that a t differene in grou ommon equity ratio translates into additional aital of RM3.5bil or 6% of market aitalisation. However, CIMB s grou ommon equity ratio remains within the omfortable range required (see Table 2 above). More imortantly, CIMB has also onfirmed that the omutation of its grou ommon equity ratio is already based on Bank Negara s more onservative onet aer issued in May 22. s for CIMB viva, viva is believed to have invited bids for its 49% stake in the insurane entity. CIMB has a 5% shareholding. The interest is strong, with about 3 to 4 shortlisted bidders. With the sale of CIMB viva, CIMB estimates that the grou leverage ratio will dro omfortably to 2x from the urrent 8x. It onsiders non-ore assets to be the rivate equity divisions, life and general insurane divisions. Thus, CIMB onfirms it remains on trak to meet its dividend ayout ratio guidane of 4% to 6% for FY2F, desite lowering the interim dividend ayout ratio reently to 8% on grounds of rudene. TP LINE GRWTH REMINS HELTHY The omany alluded that loans growth for the grou is marginally below its targeted 6% loans growth for FY2F, but remains at healthy levels with ororate loans growth likely at ira 5%. These are baked by strong growth in Thailand and Singaore. In terms of net interest margin (NIM), Indonesia is exeted to exeriene deline in NIM given ometitive ressure, while Malaysia is likely to be flat. Singaore s NIM is exeted to imrove. verall grou NIM is still exeted to deline by ira bs YoY in FY2F. For CIMB, the imat is more in terms of the requirement to dedut the entire % of the marked-tomarket gain related to seurities available for sale of RM664mil, omared to artial reognition that is allowed under BSEL 3. mresearh Sdn Bhd 2

3 CIMB Grou Holdings 25 tober 22 TBLE 2: BREKDWN BY DIVISINS (PBT) YE De (RMmil) Q 2Q 4Q Q2 2Q2 QoQ % hg YoY % hg Consumer Banking (97.3) - Malaysia (99.4) - Indonesia (59.4) - Singaore () (5) (7) () 3 (4.) 7,9. - Thailand 5 (6) (3) (4) - (.), thers (2) (2) (2) () (2). (5,.) Wholesale Banking (96.6) - Investment Banking Cororate Banking (93.4) - Markets (.8) (7.7) Investments (4.6) (2.2) PBT,233,278,45,34, (99.2) Soure: Comany / mresearh NN-INTEREST INCME SUPPRTED BY BNDS ND MRKETS Markets division ontinues to do well The non-interest inome division remains well-suorted by the markets division (see Table 2 above). We understand that the markets division has ontinued to benefit from strong flows in terms of forex and interest rate hedging ativities by third arty ustomers. (To rea, for 2QFY2, the markets division reorded an.8% dro, but we understand that QFY2 inluded ontributions from the debt aital market on aount of its lead role in the issuane of Projek Lebuhraya Usahasama Bhd s (PLUS) RM3.6bil bonds in January 22). market share rimarily from loal banks in the region. Bonds division remains healthy The bonds division is also exeted to remain healthy. For the Malaysia rivate debt seurities market, new issuane has totalled RM87bil in the eight months to ugust 22 (latest available data) omared with RM69.6bil in 2 (see Chart below). We exet CIMB to remain a major artiiant. In addition, CIMB alluded to the Indonesian bonds market erforming relatively well so far this year, omared to a more subdued base last year. We understand that these are third arty ustomers in the exorts and imorts segments, with flows inreasing strongly for all three major markets of Malaysia, Thailand and Singaore. CIMB alluded to ontinuing to gain CHRT : NEW ISSUE F PRIVTE DEBT SECURITIES (EXCLUDING CGMS) IN MLYSI. 9. (RM bil) YTD ug 2 Soure: Comany / mresearh mresearh Sdn Bhd 3

4 CIMB Grou Holdings 25 tober 22 It exets infrastruture-related debt, and thus, the bonds market to rise signifiantly given that it believes Indonesia is likely to undergo a major infrastruture-led sending artiularly following the assing of the Land Relamation t in that ountry. CIMB Niaga is now ranked no 4 in terms of bonds issuane in Indonesia in HFY2, u signifiantly from its no 3 osition in HFY. CIMB NIG S NN-INTEREST INCME HS BEEN N N UPWRD HELTHY TREND CIMB s non-interest inome has been on a healthy uward trend sine 25, with more than a fivefold inrease (see Chart 2 below). We estimate that CIMB Niaga s ontribution to grou non-interest inome at 24.6% in FY and 3% in FY2F (see Chart 2 below). ur data in the hart below does not take into aount any sale of ex-lio LDR bonds whih are reorted at the grou level, but not at CIMB Niaga level. (Reall that the gains were related to the sale of ex- Lio s IDR government bonds, whih were booked under the CIMB Niaga at grou level but not in the results for CIMB Niaga. We estimate the total gains from ex-lio bonds amounted to RM378mil in FY and none in FY). In fat, the non-interest inome in HFY2 for CIMB Niaga had remained strong given some treasury gains as well, whih translated into an annualised non-interest inome of above RMbil for FY2. So, in a nutshell, CIMB Niaga s ontribution is rising healthily, whih should hel to underin the non-interest inome ahead. CHRT 2: CIMB NIG S NN-INTEREST INCME CNTRIBUTIN T GRUP NN-INTEREST INCME (RMmil),2 CIMB Niaga total non-interest inome in RMmil Niaga's ontribution to grou non II 36 35%, 96 3% 3% 8 25% 25% % % % 8% % 5% 2% 5% % 5% F % Soure: Comany / mresearh. Note FY2F based on annualised HFY2. mresearh Sdn Bhd 4

5 CIMB Grou Holdings 25 tober 22 CHRT 3: CIMB GRUP S TTL NN-INTEREST INCME (RMmil) Foreast Imlied non-interest inome at urrent share rie level ,633 3,694 3,96 3,725 3,844 3,766 3, ,635 2,644 3, ,,45, Soure: Comany / mresearh Base ase senario for non-interest inome is still at least a RM2.5bil base From this, we estimate that the base gross interest inome for the grou is unlikely to dro to the re-25 level, say of RM.5bil in FY4 (see Chart 3 above). Reall this was before CIMB s full transformation into a universal bank. We would argue that the base ase non-interest inome should be at least RM2.5bil, given that CIMB Niaga is now likely to ontribute a minimum of RMbil in noninterest inome.a. base non-interest inome level of RM2.5bil imlies a base RE of 2.9% FY3F (vs. our urrent foreast of 5.8%), net earnings of RM3.8bil (vs. our urrent foreast of RM4.7bil) and the base ase fair value of RM6.8/share FY3F. t the urrent share rie, this is riing in a non-interest inome level of RM3bil, whih is not far off from our estimated worst-ase senario of RM2.5bil. RLLING FRWRD FIR VLUE T FY3 The grou aears to be unlikely to embark on another aquisition so soon given its reent BoC and RBS aquisitions. It hinted that it would be interested in further aquisitions only if P/BV is low. We believe CIMB is also on trak to meet its redit osts guidane of 3bs for FY2F, given that HFY2 s redit osts had been low at only 2bs. In terms of ossible adjustments to LGD rates whih for the grou is quite high, averaging around 43% urrently, CIMB hinted that this is likely to be adjusted gradually over the longer term. CIMB believes that its LGD rates should reflet a lower figure, given that, for examle, the LGD for its mortgage ortfolio is about 28%. Earlier the grou had hinted that ossible release in write-baks may amount to RM2mil with a one-off adjustments to its LGD rates. Consensus net earnings is RM4.26bil in FY2F, and onsensus foreast growth is 2.6% to RM4.8bil in FY3F. CIMB hinted that the foreast growth of 2% to 3% FY3F does not look unreasonable. We have now rolled forward our base year to FY3F, leading to a new fair value of RM9.7/share (vs. RM8.7/share reviously). This is based on an RE of 5.8% FY3F (vs. 5.7% FY2F) and an unhanged fair P/BV of 2.3x. To rea, CIMB s key KPI targets for FY2F are maintained:- ) RE of 6.4% FY2F. CIMB hinted that it remains on trak to ahieve its RE target for FY2F. 2) Dividend oliy of 4% to 6%. 3) Grou loans growth target of 6%. 4) Grou deosit growth target of 6%; 5) Loan loss harge of.3% vs. our foreast of 53bs. 6) Tier (at CIMB Bank) (Basel 2) of at least %. 7) Total RWCR (at CIMB Bank) (Basel 2) of at least 2%. mresearh Sdn Bhd 5

6 CIMB Grou Holdings 25 tober 22 TBLE 8: FINNCIL DT Inome Statement (RMmil, YE 3 De) F 23F 24F Net interest inome 6, , , ,452. 7,998.6 Non-interest inome 3,96.2 3, ,844. 3, ,98.6 Islami banking inome,33.,47.3,67.4,779.,957. Total inome,783.5,872. 2, , ,864.2 verhead exenses (6,525.8) (6,629.9) (5,966.3) (5,985.3) (6,22.4) Pre-rovision rofit 5, ,242. 6,458. 7,2. 7,84.8 Loan loss rovisions (67.2) (487.3) (885.2) (846.3) (893.) Imairment & others (27.2) ssoiates Pretax rofit 4, ,23. 5,73.3 6, ,23.6 Tax (956.8) (,28.8) (,432.8) (,583.) (,78.9) Minority interests (69.) (43.5) (3.8) (53.4) (77.6) Net rofit 3,52.8 4,3.8 4, , ,265.2 Core net rofit 3,52.8 4,3.8 4, , ,265.2 Balane Sheet (RMmil, YE 3 De) F 23F 24F Cash & deosits with FIs 27, , , , ,47.3 Marketable seurities 6, , , , ,296. Total urrent assets 89,74.5 9,75. 9,.7, ,766.3 Net loans & advanes 59,8.4 83,44. 94,3.5 28, ,25.8 Statutory deosits..... Long-term investments,4.4 5,84.,7.8,635. 2,656.5 Fixed assets,442.9, , , ,383. Intangible assets 9,72.8 9, ,98.6 9,98.6 9,98.6 ther long-term assets 8, , , , ,346.7 Total LT assets 8,9.8 28, , , ,545.6 Total assets 269, , , , ,3.9 Customer deosits 99, , ,. 264, ,3.9 Deosits of other FIs 3,92.2 2, , , ,66.5 Subordinated debts 4, ,44.3,784.,784.,784. Hybrid aital seurities 8,687.4,784.,826.2,868.7,9.8 ther liabilities 9,92.7 8,73.9 9,458.5,277.5,78.5 Total liabilities 245, , , , ,72.5 Shareholders funds 23,23. 25, ,265. 3, ,35. Minority interests Key Ratios (YE 3 De) F 23F 24F Total inome growth (%) Pre-rovision rofit growth (%) 8.4 n/a Core net rofit growth (%) Net interest margin (%) Cost-to-inome ratio (%) Effetive tax rate (%) Net dividend ayout (%) Key ssumtions (YE 3 De) F 23F 24F Loan growth (%) Deosit growth (%) Loan-deosit ratio (%) Gross NPL (%) Credit harge-off rate (%) (.4) (.3) (.4) (.4) (.4) Loan loss reserve (%) RWCR (%) Core (%) Soure: Comany, mresearh estimates mresearh Sdn Bhd 6

7 CIMB Grou Holdings 25 tober 22 Published by mresearh Sdn Bhd (3355-P) ( member of the minvestment Bank Grou) 5th Floor Bangunan mbank Grou 55 Jalan Raja Chulan 52 Kuala Lumur Tel: (3) (researh) Fax: (3) Printed by mresearh Sdn Bhd (3355-P) ( member of the minvestment Bank Grou) 5th Floor Bangunan mbank Grou 55 Jalan Raja Chulan 52 Kuala Lumur Tel: (3) (researh) Fax: (3) The information and oinions in this reort were reared by mresearh Sdn Bhd. The investments disussed or reommended in this reort may not be suitable for all investors. This reort has been reared for information uroses only and is not an offer to sell or a soliitation to buy any seurities. The diretors and emloyees of mresearh Sdn Bhd may from time to time have a osition in or with the seurities mentioned herein. Members of the minvestment Grou and their affiliates may rovide servies to any omany and affiliates of suh omanies whose seurities are mentioned herein. The information herein was obtained or derived from soures that we believe are reliable, but while all reasonable are has been taken to ensure that stated fats are aurate and oinions fair and reasonable, we do not reresent that it is aurate or omlete and it should not be relied uon as suh. No liability an be aeted for any loss that may arise from the use of this reort. ll oinions and estimates inluded in this reort onstitute our judgement as of this date and are subjet to hange without notie. For mresearh Sdn Bhd Benny Chew Managing Diretor mresearh Sdn Bhd 7