KUALA LUMPUR (Feb 22): AmInvestment Bank Research (AmResearch) has upgraded CIMB Group Holdings Bhd to a "buy" from "hold", and revised up its fair value (FV) to RM5.20 from RM4.10, saying the stock's “valuation remains undemanding”, and that the bank is one of the systematically important banks envisaged to post improved earnings by riding on the economic recovery.

AmResearch analyst Kelvin Ong said in a note today that the revised FV for CIMB was based on its forecast of a return on equity (ROE) of 7% for the financial year ending Dec 31, 2022 (FY22), leading to a price to book value (P/BV) of 0.8 times.

“We retain our earnings estimates. [Our] valuation remains undemanding with the stock trading at 0.7 times P/BV,” he said.

Meanwhile, Ong expects CIMB's 92.5%-owned PT Bank CIMB Niaga TBK’s earnings to be stronger for FY21, with optimism about the vaccination programme likely to boost consumer and business sentiment, leading to an economic recovery in Indonesia.

“Core fee income is expected to rise and be supportive of Niaga’s non-interest income (NOII) for FY21,” he said.

He also said the management had guided for an improvement in Niaga’s FY21 loan growth, expanding by 3% to 5%, with a lower credit cost of 2.4% to 2.6% (FY20: 2.83%).

“On Niaga’s FY21 net interest margin (NIM), the guidance is 4.8% to 5% versus 4.88% for FY20. Meanwhile, [the] FY21 ROE guidance is higher at 7% to 9%, compared with FY20’s 5.01%, supported by a cost to income (CI) ratio of less than 49%,” he added.

Last Friday, Niaga announced that its net profit improved 23.3% quarter-on-quarter (q-o-q) to 148 billion rupiah (about RM42.46 million), due to higher operating income from an uplift in net interest income (NII) partially offset by an increase in provisions.

The Indonesian subsidiary’s NOII declined q-o-q for the fourth quarter ended Dec 31, 2020 (4QFY20), largely attributed to lower gains from marketable securities.

For the full year, Niaga’s core net profit fell 48.6% year-on-year (y-o-y) to two trillion rupiah on lower NII due to a contraction in loans and its NIM.

Its NOII fell largely due to lower fees, commission income and recovery income, with the non-repeat of substantial gains from the sale of non-performing loans (NPLs) in FY19.

At 11.14am today, CIMB had fallen two sen or 0.47% to RM4.23, valuing the company at RM42.17 billion.