Deposit-led Approach And Cost Efficiency Will Improve Revenue Stability

Key Takeaways

• Strategic shift to deposit-led strategy and cost efficiency improves NIM, cost-to-income ratio, and revenue stability.
  
• Focus on niche markets and asset quality improvements enhances earnings potential and boosts return on equity.
  
• Intensifying competition and macroeconomic uncertainties may pressure net interest margins, constrain profitability, and elevate operational costs impacting CIMB Group's earnings.

Catalysts

Provides various banking products and services in Malaysia and internationally.

• CIMB Group's strategic shift to a pricing discipline and deposit-led strategy has led to net interest margin (NIM) expansion, indicating potential revenue growth despite expected normalization.
  
• The group's focus on cost efficiency and technology investments has resulted in an improved cost-to-income ratio, suggesting potential future improvements in net margins.
  
• CIMB's improved asset quality, reflected in the reduced gross impaired loans (GIL) ratio and increased allowance coverage, can positively impact earnings by reducing future provisions.
  
• The planned intensification of a deposit-led strategy and enhancement of transaction banking systems are poised to strengthen the deposit franchise, supporting future revenue stability.
  
• The bank's strategic realignment and focus on niche markets in Thailand, along with reallocating capital from underperforming sectors, could optimize earnings and enhance return on equity (ROE).

CIMB Group Holdings Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CIMB Group Holdings Berhad's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.5% today to 34.8% in 3 years time.
• Analysts expect earnings to reach MYR 9.2 billion (and earnings per share of MYR 0.86) by about December 2027, up from MYR 7.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR 10.5 billion in earnings, and the most bearish expecting MYR 8.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, up from 11.2x today. This future PE is greater than the current PE for the MY Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.68%, as per the Simply Wall St company report.

CIMB Group Holdings Berhad Future Earnings Per Share Growth

Risks

• Competition for liquidity is intensifying, potentially applying pressure on the net interest margin (NIM) and impacting revenues and net interest income.
  
• The bank anticipates macroeconomic uncertainties, including inflationary global policies, which may exacerbate liquidity competition and adversely affect earnings.
  
• In Malaysia, the anticipated seasonal decrease in NIM due to loan pricing competition could negatively affect net margins.
  
• Economic and regulatory changes across Southeast Asia, especially in countries like Thailand with low ROE performance, may constrain profitability and earnings growth.
  
• Plans for investing in technology and customer experience require capital; however, this could lead to higher operational expenses, affecting net margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of MYR 8.96 for CIMB Group Holdings Berhad 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 MYR 10.0, and the most bearish reporting a price target of just MYR 7.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MYR 26.5 billion, earnings will come to MYR 9.2 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 9.7%.
• Given the current share price of MYR 8.02, the analyst's price target of MYR 8.96 is 10.5% 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.