BIMB’s 3Q19 net profit increased 7% QoQ given robust total income growth and lower effective tax rate. Also, financing growth picked up momentum and asset quality improved but NFM slipped. Overall, results were within expectations but we cut our payout assumption by 2ppt to reflect weaker-than-expected DPS. In our view, the risk-reward profile remains favourable, considering its rosy prospects backed by positive structural drivers. Keep BUY and GGM-TP of RM5.00, based on 1.42x 2020 P/B.

In line. BIMB posted 3Q19 earnings of RM208m (+7% QoQ, +5% YoY), which in turn brought the 9M19 sum to RM606m (+16% YoY). This met expectations (making up 78% of our full-year forecasts) but came in slightly ahead of consensus (at 81%).

Dividend. A DPS of 16.0sen (+3% YoY) was declared. Ex-date TBD later. This was below expectations as we forecasted DPS of 18.5sen.

QoQ. The total income growth of 5% and lower effective tax rate (-4ppt) translated to a 7% jump in bottom-line; this was despite the 15% rise in financing loss allowances coupled with the negative effect of net financing margin (NFM) slipping 3bp to 2.53%.

YoY. If not for the spiked in provision for financing loss (+31%), net profit could have climbed faster (+5%); income from its Takaful operations was strong (+25%), which led to an 8% increase in total revenue.

YTD. Similar to YoY performance, earnings rose 16% given better total income growth (+14%) but was capped by higher provision for bad financing (+40%).

Other key trends. Financing growth gained momentum to 8.7% YoY (2Q19: +7.2%) while deposits followed suit, rising 11.2% YoY (2Q19: 10.2%). However, financing-to deposit ratio (FDR) was held steady sequentially at 89% (+2ppt). As for asset quality, gross impaired financing ratio fell 8bp QoQ to 1.11% due to lower new bad financing formation (-47% QoQ).

Outlook. For Islamic Banking, any NFM slippage can be proactively managed, in our view, since it has leeway to optimize its low FDR of 89%. 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 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 comprises of salary deduction and transfer packages, and (ii) first home buyers make up majority of its mortgage portfolio. As for its Takaful business, the company is well positioned to ride the Islamic finance wave and positive structural industry dynamics, over the longer-term.

Forecast. We keep our FY19-21 earnings forecast but lower FY20-21 DPS estimates by 9% (implying payout of 38% from 40%).

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 1.45x but ahead of the sector’s 1.00x. 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 0.82x 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 - 9 Dec 2019