Focusing On Profitable ASEAN Markets And Technology Will Improve Operational Efficiency

Key Takeaways

• Strategic capital reallocation and focus on profitable segments are poised to enhance long-term earnings and ROE.
  
• Sustainability initiatives in ASEAN position CIMB to capitalize on future growth in sustainable financing and boost revenue streams.
  
• Challenging liquidity, potential net interest margin compression, and geopolitical risks may pressurize CIMB's profitability, revenue growth, and asset quality across key markets.

Catalysts

Provides various banking products and services in Malaysia and internationally.

• CIMB's strategy to focus on deposits and a client franchise, despite rate cuts, supports net interest margins and positions the company for future revenue growth.
  
• Their proactive management of asset quality and increased allowance coverage to 105.3% positions CIMB for improved net margins through reduced credit costs.
  
• Strategic capital reallocation, particularly exiting less effective markets and focusing on profitable segments, is expected to enhance long-term earnings and ROE.
  
• Investments in technology and a customer-centric culture are likely to improve operational efficiencies, thereby positively impacting net margins and earnings.
  
• Sustainability initiatives and commitments in the ASEAN region position CIMB to capitalize on future growth in sustainable financing, potentially boosting revenue streams.

CIMB Group Holdings Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CIMB Group Holdings Berhad's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.0% today to 35.3% in 3 years time.
• Analysts expect earnings to reach MYR 9.1 billion (and earnings per share of MYR 0.85) by about March 2028, up from MYR 7.7 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 14.0x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the MY Banks industry at 10.1x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.84%, as per the Simply Wall St company report.

CIMB Group Holdings Berhad Future Earnings Per Share Growth

Risks

• The liquidity situation in Indonesia remains challenging due to government competition for funds, which might lead to tighter liquidity and increased funding costs for CIMB in the region, potentially impacting net margins and earnings.
  
• There is a risk of net interest margin (NIM) compression in key markets like Indonesia, Singapore, and Thailand, which could pressure CIMB's profitability and net margins.
  
• Economic uncertainties and geopolitical issues could disrupt growth forecasts and market stability, potentially affecting revenue growth through lower loan demand or increased credit risk.
  
• The aggressive pursuit of deposits might lead to higher funding costs if market conditions shift unfavorably, impacting CIMB's cost-to-income ratio and net margins.
  
• The bank's exposure to the data center sector and reliance on infrastructure funding activities carry potential risks if there are issues like speculative builds without secured demand, which could affect asset quality and earnings stability.

Valuation

• The analysts have a consensus price target of MYR8.849 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 MYR9.7, and the most bearish reporting a price target of just MYR7.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR25.9 billion, earnings will come to MYR9.1 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 9.8%.
• Given the current share price of MYR6.93, the analyst price target of MYR8.85 is 21.7% 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.