Highlights

• Crown jewels in Islamic financial services. BIMB is an investment holding company that owns crown jewels in Islamic financial services, namely Bank Islam (100% holding; 80% of revenue) and Syarikat Takaful Malaysia or STMB (60.3% holding; 19.5% of revenue). Other companies under its stable are BIMB Securities (100% holding) and BIMB Ar-Rahnu.

• Strong market share. In terms of total assets (Islamic banking), Bank Islam is ranked third in 2015 with RM57bn of assets, behind Maybank Islamic and CIMB Islamic.

• Very healthy ROE. BIMB consistently delivers top tier ROE in the industry post Bank Islam stake acquisition (FY15-16e: average of 11%). Only two other banks (Public Bank and AFG) manage to maintain double-digit ROE.

• High CASA ratio cushioning margin compression. Bank Islam’s CASA ratios (37%-47%; industry average: 25%) benefits mainly from deposits from Government bodies/agencies and religious associations. The edge of lower cost of funds accords Bank Islam a control over product pricing to remain competitive in the consumer financing segment.

• Strong asset quality. Bank Islam gross impaired financing (GIF) improved from a high of 22% in FY05-FY06 to 1.1% in FY2015 aided by an efficient cleanup of its balance sheet and substantial writebacks post turnaround plan.

• STMB – The only listed takaful operator with decent market share. STMB is the first and only pure takaful operator listed in the Bursa Malaysia. STMB sustained its position as the market leader in the Family Takaful business, capturing 25% of the market share.

Risks

• New regulatory on Investment Account, economic slowdown and high household debt.

Forecasts

• We project FY16-18 earnings growth of 13.7%, 4.2% and 2.6% respectively driven by continuous income growth from Banks Islam and STMB. All-in-all, this implies robust 3-year earnings CAGR of 7%.

Rating

Initiate with BUY, RM5.00 TP (+16% upside)

• BIMB offers investors exposure to Islamic finance, both banking and takaful industry. Given the nature of under penetration for both industries in Malaysia, we are positive that BIMB is in the pole position to benefit from further proliferation of Islamic financial services in the country.

Valuation

• We initiate coverage on BIMB with BUY rating and TP of RM5.00, citing a 16% upside potential.

• In deriving our TP, we apply Gordon-Growth valuation model to value BIMB which comprises (i) P/B of 1.9x and (ii) ROE of 12%.

• We believe that BIMB deserves a premium in the banking industry given it’s the only Syariah-compliant full-fledged banks listed on Bursa Malaysia, riding on the underserved and rising Islamic finance awareness in Malaysia.

Source: Hong Leong Investment Bank Research - 7 Feb 2017