We met with Bank Islam’s management recently and came back positive on its earnings prospect in FY18. Bank Islam is positive that it is able to sustain its financing growth trajectory which is above system loan growth thanks to its focus in household financing. While Bank Islam was a late comer in the SME segment, it witnessed strong flow of applications and approvals in this segment as a result of its tie-up with GLCs. Bank Islam does not expect a significant NIM slippage in the upcoming quarter, as it has been growing its CASA to fund its financing growth. Maintain our earnings forecasts, TP of RM4.90 and BUY recommendation.

We met with BIMB’ 100% stake owned- Bank Islam. Bank Islam was represented by its acting CEO, Mr Muazzam. We came back feeling positive on the prospect going forward. Below are the key meeting takeaways.

Financing growth. Bank Islam is positive that it is able to sustain its financing growth trajectory which is above system loan growth thanks to its focus in household financing (which accounts for 76% of its total financing). On segmental basis, we understand that personal financing (which accounts for 29% of total financing) will benefit from improving consumer sentiment (arising from tax holidays and improving consumer index) and its partnership with government agencies, while mortgage financing (which accounts for 40% of total financing) will continue to do well despite intense competition among industry players, thanks to its competitive offerings.

SME segment to boost loan growth. While Bank Islam was a late comer in this segment, it witnessed strong flow of applications and approvals in this segment as a result of its tie-up with GLCs, namely TNB and Petronas. Bank Islam clarified that the companies registered as vendors for these GLCs have better asset quality and cash flow and hence, limiting the downside risk for impaired loans. Bank Islam indicated it has a strong pipeline and this will translate into better loan growth in FY18.

Transformation works. No major transformation works, as Bank Islam tackles it on case by case basis as compared to its peers that have been investing large proceeds. In addition, it is not expecting to cut branch networks but instead, went for the reshuffling of manpower into sales function to create more asset generation which has yielded positive results so far.

No significant NIM slippage. Although repricing of deposits has started kicking in, Bank Islam does not expect a significant NIM slippage in the upcoming quarter, as it has been growing its CASA to fund its financing growth.

All in… We should see solid quarter for BIMB in 2Q18, on the back of our anticipation of a stellar set of performance by Bank Islam (which accounts for 75% of BIMB’s earnings). We believe its healthy operating income, well contained opex and deceleration of allowance for provision will be the key for BIMB to register solid earnings.

Forecast. No Change to Our Forecast.

Maintain BUY, TP: RM4.90. Maintain BUY recommendation with unchanged TP of RM4.90 based on GGM valuations of (i) COE of 13.6% (ii) WACC of 8.2%. Bank Islam’s financing growth has consistently outpaced system loan growth (given its exposure in the retail segment, in particular, government staff, which have superior asset quality) while STMB’s earnings are still at growth stage given its lion share in the Family and General Takaful segment.

Source: Hong Leong Investment Bank Research - 21 Aug 2018