BIMB’s 2Q20 core net profit was up 19% QoQ, thanks to strict cost controls and lower financing loss provision. Besides, financing growth picked up momentum and asset quality held steady, but NFM compressed QoQ. Overall, results were ahead of estimates due to lower-than-expected cost of funds; we raise FY20 net profit forecast by 5% but maintain FY21-22 estimates. Although valuations are undemanding, BIMB’s risk-reward profile remains balanced as there are no compelling re-rating catalysts. Retain HOLD and GGM-TP of RM3.55, based on 0.93x FY21 P/B.

Above estimates. Excluding net modification loss, BIMB posted 2Q20 core net profit of RM248m (+19% QoQ, +27% YoY), bringing 1H20 sum to RM457m (+15% YoY), This came in above estimates, forming 75% of our full-year estimates (due to lower than-expected cost of funds), while making up 68% of consensus (broadly in-line, as its financing loss allowances have not spike drastically like other banks).

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

QoQ. Positive Jaws from the slower 8% total income decline vs a steeper opex fall of 19% (due to weak Takaful operations income and strict cost controls), have led core earnings to rise 19%. Also, this was aided by the decrease in financing loss provision (-16%). During the quarter, net financing margin (NFM) slipped 8bp to 2.30%

YoY. Core bottom-line spiked 27%, again thanks to the drop in opex (-7%) and lower allowances for bad financing (-12%).

YTD. Total income growth of 3% (from better net financing, +11%) and discipline cost management (flat opex) have trickled down and boosted core net profit by 15%.

Other key trends. Financing growth gained momentum to 12.1% YoY (1Q20: +9.3%) while deposits followed suit, rising 6.5% YoY (1Q20: 2.4%). Sequentially, financing-to deposit ratio (FDR) was down 2ppt to 92%. For asset quality, gross impaired financing (GIF) ratio fell 13bp QoQ to 0.70% due to the effect of loan moratorium.

Outlook. For Islamic Banking, another OPR cut (-25bp) in 2H20 will continue to exert pressure on NFM. Also, financing growth is anticipated to taper as repayment occurs post-moratorium. Separately, we expect GIF ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from BIMB; however, it may mask actual damage and cause a lag in NPL formation if the situation does not improve expeditiously or an advent of Covid-19 second wave paralyses the country again. As for its Takaful business, we see: (i) sales slowdown of credit related products, (ii) family takaful customers on regular plans dropping out, and (iii) low rate environment leading to higher takaful contract liabilities.

Forecast. We raise FY20 net profit forecast by 5% to factor in lower cost of funds but keep FY21-22 estimates.

Retain HOLD and GGM-TP of RM3.55, based on 0.93x FY21 P/B with assumptions of 10.2% ROE, 10.7% COE, and 3.0% LTG. This is below its 5-year average of 1.32x but ahead of the sector’s 0.78x. The discount/premium is fair given its ROE output is 5ppt/2ppt beneath/above its 5-year/industry mean. BIMB’s risk-reward profile remains balance despite undemanding valuations as there are no compelling catalysts to re rate the stock.

Source: Hong Leong Investment Bank Research - 28 Aug 2020