• We maintain our BUY call and FV for BIMB at RM5.40/share based on an FY19 P/BV of 1.7x, supported by an ROE of 12.5%. Our forward P/BV is in line with the stock's 3- year historical average P/BV of 1.68x.

• The group is considering converting the current financial holding company structure to that of a bank entity as a holding company. This will be similar to the structure of RHB, Alliance Bank and Affin. However, we understand that this plan is likely to be delayed in view of the changes to the board of directors of Tabung Haji, its largest shareholder. There is no urgency for this change. It remains uncertain as of now on the timing and the changes that will be pursued within the group on the new structure.

• Earlier, it was reported that the group will potentially dispose of a portion of its stake in its subsidiary Syarikat Takaful (STMB) to repay the outstanding sukuk of RM1.3bil at BIMB Holdings (company level) to facilitate the restructuring. Management clarified that this will not materialise as it will reduce the contribution of earnings from STMB, which is still key to the group’s profits.

• The group has surpassed the capital ratios (CET1: 7.0%, Tier 1: 8.5% and Total Capital: 10.5%) required of financial holding companies on Jan 2019. As at the end of March 2018, the fully loaded CET1, Tier 1 and Total Capital ratio at BIMB Holdings (company level) stood at 10.74%, 10.74% and 14.56% respectively.

• Management hinted that the group’s personal loans will be minimally affected by the termination of 17,000 government staff contracts under the new government. We understand that their personal loans were mainly extended to full-time employees and not short-term contract workers. Meanwhile, on the review of projects/contracts, the group does not have exposure to large scale contractors.

• Recall, that the group reported a net provision of RM21.2mil (annualised credit cost: 20bps) in 1QFY18. This was largely due to the impairment of a construction loan in which works completed by the contractor (borrower) were disputed. We gather that the exposure to this loan was circa RM30mil and allowance of losses has already been fully provided.

• 2QFY18 is likely to see some upticks in impairment of consumer financing loans. This is due to the festive season which has caused the need to reclassify the financings as impaired after 30 days of the payment due date. It will lead to an uptick in the group’s overall GIL ratio from 0.99% in 1QFY18, consequently resulting in an increase in collective allowances with a net provision for loan losses in 2QFY18. Nevertheless, the provisions in 2QFY18 are expected to be lower than the preceding quarter while its GIL ratio is still expected to be significantly lower than the industry’s 1.6%. We expect the arrears for consumer financing to be eventually regularised in 3QFY18, consequently lowering back the group’s GIL ratio.
• On a comforting note, credit cost is still on track to meet our assumption and management’s guidance of 23bps and 20–22bps respectively for FY18.

• In the quarters ahead, there remains some pressure on the group’s funding cost. This is due to the need to raise longer term funding to comply with the impending requirement of a net stable funding ratio of at least 100%. Despite this pressure, management still aims to keep its net income margin (NIM) stable at 2.6% for FY18. It plans to raise the mix of the group’s expansion in consumer financing to comprise more personal financing, which carries higher yields compared to house financing. This, coupled with active asset and liabilities management by its Treasury to increase its asset yield, are initiatives to counter the funding cost pressure and stabilize its NIM. We expect the NIM expansion of 3bps QoQ to 2.63% in 1QFY18 that has benefitted from the Jan 2018 OPR hike to taper in the subsequent quarters of FY18 contributed by a rise in funding cost.

• Management is still guiding for a financing growth of 8-10% for FY18. We have imputed into our FY18 estimates, a loan growth expectation of 8.0%. The group’s growth of consumer financing now consists of 45% personal financing and the remaining 55% in house financing (target for FY18: 50% personal and 50% house financing). To expand its SME base, the group’s is targeting the supply chain financing. It plans to focus on SMEs which have secured contracts from GLCs such as Petronas. These comprises self-liquidating working capital financing. Proceeds from these contracts will be channelled directly to the bank to settle the financing.

• The group’s gross financing grew by 6.7%YoY in 1QFY18. This was still above the industry rate. It was primarily driven by personal financing which had been tied to salary deduction of employees as well as the secured house financing. We remain comforted by the group’s negligible exposure to large infrastructure companies that will be impacted by the termination and review of projects.

• BIMB’s foreign shareholdings remained low at 1.35% as at end of 1QFY18.

Source: AmInvest Research - 21 Jun 2018