KUALA LUMPUR (Jan 21): Hong Leong Investment Bank Research has upgraded CIMB Group Holdings Bhd to "buy" at RM5.12 with a higher Gordon growth model target price of RM5.70, from RM5.25 previously.

In a note today, HLIB Research said it turned positive on CIMB with a view that management will introduce a cash portion to its dividend payout, which should help to defend returns on equity better, and it provides one of the best values, pricing wise, among larger banks.

The research house stated that marketing expense in 4Q19 is expected to increase year-on-year (y-o-y), owing to higher Touch 'n Go spending.

"Also, management shared the cost savings from FlexMyCareer locally and [the] mutual separation scheme exercise in Indonesia will not be able to fully translate to bottom-line in 2020 due to reinvestment efforts," it said.

It noted that 4Q19 loans growth momentum grew (3Q19: +5.6% y-o-y) due to chunky corporate drawdowns in Malaysia, and the robust infrastructure, and state owned enterprise-related and consumer lending fuelled strong loans growth in Indonesia.

"In Malaysia, we gathered 4Q19 net interest margin (NIM) held up quite well (despite most deposits being repriced downwards in 3Q) given benign competition for deposits," the research house said.

The management shared that quarter-on-quarter (q-o-q) NIMs were relatively stable for Indonesia and Thailand; however, it also flagged that deposits rivalry in Indonesia remained fierce and Thailand operations are subject to the ramp-up in business activity.

HLIB Research stated that excluding the one-off RM176 million non-performing loans and foreclosed asset disposal gains in Indonesia and Thailand respectively, q-o-q non-interest income is seen to be robust in 4Q19.

"This is supported by the still strong trading and investment gains (the 10-year MGS (Malaysian Government Securities) yield has carried on to slide to 3.4% vs 3.47%/3.77%/3.94% in 3Q/2Q/1Q) coupled with better fee income from wealth management business and loan-related transactions," it added.

In general, CIMB's 4Q19 asset quality stayed stable but net credit charge was guided to climb sequentially (3Q19; 45bp) on the back of provisioning top-up for one to two business accounts in Indonesia as their credit risks have increased.

The group shared that there were no asset quality stress at its mortgage books, and it did not see any abnormal spike for its rescheduled and restructured loans, post-introduction of the new credit risk guideline by Bank Negara Malaysia in October 2019.

At 10.26am, CIMB Group shares rose 1 sen or 0.2% to RM5.13, for a market capitalisation of RM50.9 billion.