No surprises, BIMB’s 2Q19 net profit jumped 30% YoY, thanks to stronger total income growth as both its Islamic Banking and Takaful divisions have depicted another commendable quarterly performance. However, we saw the weakening of asset quality but is still not yet at alarming levels, given that gross impaired financing ratio remains at low levels and financing loss coverage continues to be high at >100%. All in all, our forecasts are unchanged. Retain BUY and GGM TP of RM5.00, based on 1.42x 2020 P/B.

In line. BIMB reported 2Q19 net profit of RM195m (-4% QoQ, +30% YoY), bringing 1H19 earnings to RM398m (+24% YoY). This met estimates since it accounted for 51- 53% of our and consensus full-year forecasts.

Dividend. None declared as BIMB only divvy in 3Q.

QoQ. Weak total income (-4%), higher financing loss allowances (+28%) and RM5m impairment on financial assets, dragged net profit by 4%. Also, net financing margin (NFM) slipped 3bp to 2.56%. That said, the quicker drop in opex (-6% due to better control on non-personnel cost) helped to offset some of the negative impact above.

YoY. The robust 17% total revenue growth led to positive Jaws and in turn, to a 30% bottom-line acceleration. We note net financing income increased 13% while income contribution from its Takaful operations was also strong (+38%).

YTD. Similar to YoY showing, net profit jumped 24% given better total income growth (+17%), led by both net financing income (+13%) and Takaful contribution (+35%).

Other key trends. Financing growth slowed to 7.2% YoY (1Q19: +8.5%) and from a low base effect, deposits rose 10.2% YoY (1Q19: +3.9%). Sequentially, financing-to deposit ratio (FDR) was steady at 87% (-1ppt). However, asset quality weakened as gross impaired financing ratio spiked up to 1.19% (+24bp QoQ), no thanks mainly to its manufacturing, real estate, and finance-related segments.

Outlook. For Islamic Banking, any NFM slippage can be proactively managed, in our view, since it has leeway to optimize its low FDR of 87%. Besides, an above average 2019 financing growth run-rate of 6-7% is expected to be attainable as the personal lending space has demand resiliency; also, this generates higher interest yield. While for asset quality, we do not see major deterioration from here on since a large extend of its lending mix (c.76%) is skewed to household, which we expect to remain steady as: (i) 90% of its personal financing portfolio consists of salary deduction and transfer packages, and (ii) first home buyers make up majority of its mortgage portfolio. As for its Takaful business, is well positioned to ride the Islamic finance wave and positive structural industry dynamics.

Forecast. Unchanged since 2Q19 results were within estimates.

Maintain BUY and GGM-TP of RM5.00, based on 1.42x 2020 P/B with assumptions of 13.7% ROE, 10.8% COE, and 4.0% LTG. This is largely in line to its 5-year mean of 1.49x but ahead of the sector’s 1.04x. The premium is fair given its 4ppt above average ROE generation. Also, from our reverse SOP assessment, we calculated the market is only valuing Bank Islam (100%-owned) at 0.76x P/B with 10-11% ROE vs. peers at 1.04x P/B with 10% ROE, implying there is upside from current levels. The risk-reward profile remains favourable, in our opinion, considering its rosy prospects backed by positive structural drivers.

Source: Hong Leong Investment Bank Research - 29 Aug 2019