Investments In Technology And A Focus On high-RAROC Segments Will Boost Future Profitability

Key Takeaways

• Strategic focus on higher RAROC segments and CASA expansion aims to improve profitability, net interest margins, and earnings growth.
  
• Investments in technology and cost discipline are expected to enhance operational efficiency, net margins, and asset quality.
  
• Competitive pressures in mortgage and corporate sectors, CASA funding reliance, and Sharia unit spin-off could hinder growth, challenge margins, and affect earnings stability.

Catalysts

Provides various banking products and services in Indonesia and internationally.

• CIMB Niaga is strategically shifting its loan growth focus towards higher RAROC (Risk-Adjusted Return on Capital) segments like auto loans and SME sectors, particularly within secondary cities. This selectivity and strategic targeting are poised to enhance profitability and loan portfolio quality, driving future earnings growth.
  
• The bank is significantly investing in technology, including cybersecurity, data analytics, and generative AI, aimed at improving efficiencies and reducing operational losses. This technological leverage is expected to positively impact net margins and operational conformance in the coming years.
  
• There is a strategic emphasis on expanding the CASA (Current Account Savings Account) franchise, with substantial gains in the CASA ratio from 55.3% in 2019 to 67.7% currently. This focus on cheap funding sources is designed to lower the bank's overall cost of funds, thereby improving net interest margins.
  
• CIMB Niaga's robust cost discipline efforts, as seen in the reduction of its cost-to-income ratio from 49.1% to 43.6%, show potential for improved operational efficiency and profitability. Continued cost optimization is likely to support better net earnings and margins.
  
• The ongoing efforts to improve asset quality, reflected in a significant reduction in NPL and RWA density, demonstrate a commitment to maintaining a strong balance sheet. This prudent risk management approach is essential for sustainable earnings growth and reduced credit losses in future periods.

Bank CIMB Niaga Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank CIMB Niaga's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.4% today to 37.6% in 3 years time.
• Analysts expect earnings to reach IDR 9599.9 billion (and earnings per share of IDR 371.26) by about February 2028, up from IDR 6648.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting IDR10776.0 billion in earnings, and the most bearish expecting IDR8336.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 6.5x today. This future PE is lower than the current PE for the ID Banks industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.9%, as per the Simply Wall St company report.

Bank CIMB Niaga Future Earnings Per Share Growth

Risks

• The competitive pressure in the mortgage sector and low profitability margins may hinder profitable growth in this segment, potentially impacting the bank's overall net interest margins and revenue from residential lending.
  
• The high level of competition in the corporate banking segment could limit growth opportunities in this area, potentially affecting the bank's revenue from corporate lending and its overall loan growth strategy.
  
• The reliance on funding through CASA amidst a competitive deposit environment might lead to challenges in maintaining a low cost of funds, which could pressure net interest margins if not managed effectively.
  
• The need for strategic asset allocation under RAROC principles might limit growth opportunities in low-margin or high-risk areas, potentially leading to slower revenue growth if attractive opportunities are scarce.
  
• The impending spin-off of the Sharia unit could create transitional challenges and require significant strategic restructuring, which may impact earnings consistency and operational efficiency during the transition.

Valuation

• The analysts have a consensus price target of IDR2307.5 for Bank CIMB Niaga based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR25553.5 billion, earnings will come to IDR9599.9 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 13.9%.
  
• Given the current share price of IDR1715.0, the analyst price target of IDR2307.5 is 25.7% 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.