Even after speaking to management recently, we are still unable to pinpoint any headline gripping catalysts to re-rate the stock. We find BIMB’s asset quality is not exceptionally strong (vs peers) and insulated from the Covid-19 headwinds. Also, its top-line is one of the hardest hit in the sector considering that: (i) OPR reductions have more damaging impact to its NFM, (ii) the takaful business has to contend with weaker gross earned contribution, and (iii) it does not have a large FVOCI reserve to help cushion softness from other income sources. All in all, we cut our FY20-22 profit by 6-14% after gathering poorer indicators ahead. Regardless, valuations remained undemanding. Maintain HOLD but with a lower GGM-TP of RM3.55 (from RM3.90), based on 0.93x FY21 P/B.

We spoke to BIMB recently for some business updates. Overall tone was uninspiring and outlook is murky.

Not exceptionally insulated. Similar to peers, BIMB’s financing moratorium take-up rate was 95%. However, management emphasized the bank’s asset quality is so far resilient: (i) government workers (which makes up 50-60% of its consumer financing business) are not really impacted from Covid-19 headwinds, (ii) 90% and 45% of its personal and house financing portfolio consist of salary deduction packages, while (iii) 70% of its commercial and corporate financing are secured. Regardless, BIMB finds that 5% of its financing base to be vulnerable and more surprisingly, guided FY20 net credit cost (NCC) to come in higher at 30bp, on the back of gross impaired financing (GIF) ratio of 1.20% (1Q20: 0.83%); worst case, BIMB thinks it may hit 1.50%. These are above our estimates of 28bp and 0.95% respectively.

Top-line under pressure. Given the string of OPR reductions, BIMB is guiding FY20 net financing margin (NFM) to fall 33-34bp vs our estimate of -12bp; however, should there be another 25bp OPR cut in September, this will shave NFM by another 1-2bp. Although BIMB had realized a sizeable chunk of its debt instruments measured at fair value through other comprehensive income in 1Q20 (FVOCI; RM97m), going forward, they are not looking to aggressively crystalize the gains here as it would hurt NFM (has an untapped FVOCI reserve of RM123m). As for Syarikat Takaful (60%-owned subsidiary), management is expecting FY20 gross earned contribution to fall 15-20% while claims to be flattish. As a result, ROE is seen to drop to mid-to-high 20s vs 33% in FY19; this implies income decline of 5-10% vs our current projection of +1%.

Other key updates. Financing growth in FY20 is anticipated to taper to 4-5% from 8% in FY19. Despite tepid top-line, BIMB aims to bring down cost-to-income ratio (CIR) to 53% vs 58% in FY19; we think this is a tall order to achieve even with levers to rein in discretionary expenses. Separately, the bank is poise to incur MFRS 9-related day 1 modification loss of RM100m (on a gross basis). As for dividends, BIMB still intends to uphold its policy of 50% payout. With regards to its corporate restructuring exercise, it remains on the cards but timeline-wise will be pushed back to 4Q20 or 1Q21.

Forecast. We cut our FY20-22 profit by 6-14% after factoring in wider NFM slippage, lower income from its takaful business, and higher NCC assumptions.

Maintain HOLD but with a lower GGM-TP of RM3.55 (from RM3.90), following our profit cut. The new TP is based on 0.93x FY21 P/B (from 1.03x) with assumptions of 10.2% ROE (from 11.0%), 10.7% COE, and 3.0% LTG. This is below its 5-year mean of 1.33x but ahead of the sector’s 0.81x. The discount/premium is warranted given its ROE output is 5ppt/2ppt beneath/above its 5-year/industry average. Despite trading at undemanding valuations, there are no compelling catalysts to re-rate the stock

Source: Hong Leong Investment Bank Research - 21 Jul 2020