BIMB’s 4Q19 net profit increased 12% YoY, thanks to financing loss writebacks, lower finance cost and effective tax rate. Also, financing growth held steady and asset quality improved but NFM slipped QoQ. Overall, results were in line but we cut FY20-21 earnings by 4% to account for higher NFM contraction. The risk reward profile remains favourable, seeing its rosy prospects backed by positive structural drivers. Keep BUY but with a lower GGM-TP of RM4.50 (from RM4.80), based on 1.24x FY20 P/B.

In line. BIMB posted 4Q19 earnings of RM181m (-13% QoQ, +12% YoY), which in turn, brought the FY19 sum to RM787m (+15.4% YoY). This met expectations, making up 101% of both our and consensus full-year estimates.

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

QoQ. Total income decline of 1% and higher opex of 19% caused bottom-line to fall 13%; this was despite chalking in financing loss writebacks during the quarter. We saw net financing margin (NFM) slipping 7bp to 2.46%. Also, income from Takaful operations was weak (-4%).

YoY. Net profit climbed 12%, thanks to financing loss writebacks, decline in finance cost (-23%) and lower effective tax rate (-2ppt). Otherwise, pre-provision profit was down 8% due to negative Jaws (opex grew faster vs total income by 12ppt).

YTD. Better total income growth from Takaful operations (+24%), fall in finance cost (- 4%), and lower effective tax rate (-2ppt), lifted earnings by 15%; this was capped by the higher rise in opex (+13%).

Other key trends. Financing growth held steady at 8.1% YoY (3Q19: +8.7%) but due to a high base effect, deposits expansion slowed to 3.8% YoY (3Q19: +11.2%). That said, financing-to-deposit ratio (FDR) was unchanged sequentially at 89%. As for asset quality, gross impaired financing ratio fell 25bp QoQ to 0.86% due to lower new bad financing formation (-10% 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 2020 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. Despite 4Q19 results coming in within expectations, we cut FY20-21 profit by 4% to account for higher NFM contraction.

Maintain BUY but with a lower GGM-TP of RM4.50 (from RM4.80), following our profit cut and based on 1.24x FY20 P/B (from 1.35x) with assumptions of 12.8% ROE (from 13.5%), 11.1% COE, and 4.0% LTG. This is below its 5-year mean of 1.41x but ahead of the sector’s 0.92x. The discount/premium is fair given its lower ROE output which is 2ppt/3ppt beneath/over its 5-year/industry average. From our reverse SOP assessment, we calculated the market is only valuing Bank Islam (100% -owned) at 0.78x P/B with 10-11% ROE vs. peers at 0.92x P/B with 10% ROE, implying there is upside from current levels.

Source: Hong Leong Investment Bank Research - 28 Feb 2020