HLIB Research said CIMB Niaga could see some sequential compression in net interest margin in the second quarter of this year.
PETALING JAYA: CIMB Group
Holdings Bhd’s Indonesian banking arm will likely implement a more stringent pricing policy for new loans to mitigate the impact of higher interest rates in the country.
With the recent rate hike by Bank Indonesia, CIMB Niaga, a 92.5% indirectly held subsidiary of CIMB, could see some sequential compression in net interest margin (NIM) in the second quarter of this year (2Q24).
This is because of the lag in loan repricing against deposits and corporate loans, accounting for 38% of its book, are tougher to reprice up in order to maintain client relationship, according to Hong Leong Investment Bank (HLIB) Research.
“That said, CIMB Niaga looks to adopt stricter pricing discipline when originating new loans to blunt the above effect,” the brokerage wrote in its report yesterday.
Besides, loan growth was expected to chug along since outgoing President Joko Widodo’s expansion-focus economic policies were set to continue into the next administration led by president-elect Prabowo Subianto, HLIB Research added.
“As for asset quality, there are no major concerns, seeing that CIMB Niaga has already made large pre-emptive allowances to pad any spike in gross impaired loan ratio,” it said, noting the bank’s loan loss coverage presently stood at 113% against pre-pandemic level of around 90%.
CIMB Niaga posted a net profit of 1.68 trillion rupiah in 1Q24, up 7% quarter-on-quarter (q-o-q) and 6% year-on-year (y-o-y), in line with consensus estimates.
The sequential growth in earnings was driven by stronger top-line.
During the quarter in review, CIMB Niaga’s NIM widened 15 basis points (bps), while non-interest income (NOII) increased 36% on the back of foreign exchange (forex) and derivative gains coupled with better loan recoveries, HLIB Research noted.
On an annual basis, the earnings growth was driven by lower loan loss provision, otherwise, tepid top-line was a drag, with NIM falling 51bps and NOII contracting 4% on weaker forex and derivative gains along with lacklustre treasury performance, the brokerage noted.
Given the performance of CIMB Niaga, HLIB Research retained its “hold” call on CIMB, with an unchanged target price of RM6.55.
“All in all, we still believe CIMB’s risk-reward profile is balanced since share price has done well in recent months and it is not inexpensive (trading at plus one 1 standard deviation),” it said.
“Besides, its foreign shareholding level of 32% is close to its five-year peak. Together, these two factors should cap share price upside going forward,” it added.
