Investments In Digital Capabilities Will Improve Efficiency And Customer Experience

Key Takeaways

• Strategic investment in digital capabilities and SME/retail loans expansion is set to improve customer experience and efficiency, enhancing revenue and market share.
  
• Increasing CASA deposits through corporate plays aims for low-cost funding, supporting improved net interest margins and disciplined cost management.
  
• Intense competition and rising costs of funds threaten profitability through reduced margins, increased operational expenses, and challenges in the mortgage market and Syariah division spin-off.

Catalysts

Provides various banking products and services in Indonesia and internationally.

• CIMB Niaga's continued investment in digital capabilities is expected to improve customer experience and operational efficiency, potentially leading to increased revenue and lower operational costs. This could positively impact net margins.
  
• The bank's strategic focus on expanding SME and retail loans, particularly in secondary cities, is anticipated to grow its market share and boost loan growth, which should enhance revenue.
  
• Efforts to increase CASA (current account, savings account) deposits, particularly through corporate ecosystem plays, aim to maintain low-cost funding, which could support improved net interest margins.
  
• The projected loan growth rate of 5% to 7% and maintaining a cost-to-income ratio below 45% suggests a disciplined approach to driving revenue while controlling costs to enhance earnings.
  
• Initiatives to expand higher-margin, unsecured retail loans while maintaining a prudent risk management approach are expected to support higher yields and thus improve the bank's net interest margins.

Bank CIMB Niaga Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank CIMB Niaga's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 39.9% today to 40.3% in 3 years time.
• Analysts expect earnings to reach IDR 9278.0 billion (and earnings per share of IDR 336.53) by about May 2028, up from IDR 6825.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, up from 6.4x today. This future PE is lower than the current PE for the ID Banks industry at 19.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.67%, as per the Simply Wall St company report.

Bank CIMB Niaga Future Earnings Per Share Growth

Risks

• The intense competition for deposits has led to a significant increase in interest expenses, potentially impacting net interest margins and therefore decreasing net profit growth.
  
• The declining net interest margin (NIM) from 4.07% to 3.88% in the fourth quarter due to rising cost of funds and declining loan yields could pressure revenue growth.
  
• Challenges in the mortgage market, with high competition driving lower returns, might impact revenue and profitability in the consumer banking segment.
  
• FIFOKse risk includes potential complications with asset yields and cost of funding given uncertain policy rate movements, which may adversely impact projected NIM and earnings.
  
• The ongoing spin-off process of the Syariah division could lead to increased operational expenses, affecting the overall cost efficiency and net margins.

Valuation

• The analysts have a consensus price target of IDR2162.0 for Bank CIMB Niaga based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR2400.0, and the most bearish reporting a price target of just IDR1850.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR23004.4 billion, earnings will come to IDR9278.0 billion, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 13.7%.
• Given the current share price of IDR1750.0, the analyst price target of IDR2162.0 is 19.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.