BIMB’s 3Q20 core earnings decreased 41% QoQ due to a spike in financing loss provision. Also, sequential NFM slipped. However, financing growth held steady and GIF ratio improved. Overall, results were ahead of estimates due to lowerthan-expected cost of funds. Thus, we raise FY20-22 net profit forecast by 7-9%. We now turn positive on BIMB given that leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the battle against the virus. Upgrade to BUY rating and higher GGM-TP of RM4.15 (from RM3.55), based on 1.08x FY21 P/B.

Above estimates. Excluding net modification loss/gains (in 2Q/3Q20), BIMB chalked in 3Q20 core net profit of RM133m (-41% QoQ, -36% YoY), which brought 9M20 sum to RM568m (-6% YoY), This beat our estimates, making up 89% of full-year forecast (due to lower-than-expected cost of funds), while forming 83% of consensus (in-line).

Dividend. A DPS of 12.6sen (3Q19: 16.0sen) Was Declared. Ex-date TBD Later.

QoQ. The spike in financing loss provision (+6-fold) caused core earnings to fall 41%. Also, this was contributed by opex rising by 19%, no thanks to personnel (+14%) and other overheads costs (+25%). Besides, net financing margin (NFM) compressed 4bp during the quarter.

YoY. Again, Core Bottom-line Declined 36% Due to Higher Allowances for Bad Financing (+5-fold).

YTD. The positive Jaws from quicker total income growth (+4%) vs opex (+2%), was insufficient to cover the doubling in impaired financing provision. In turn, core net profit decreased 6%.

Other key trends. Financing growth held steady at 12.0% YoY (2Q20: +12.1%) while deposits tapered slightly to 5.1% YoY (2Q20: +6.5%) respectively. In turn, sequential financing-to-deposit ratio (FDR) was up 3ppt to 95%. For asset quality, gross impaired financing (GIF) ratio fell 10bp QoQ to 0.60% due to the effect of loan moratorium.

Outlook. For Islamic Banking, we see subsiding NFM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NFM recovery. That said, financing growth is seen to taper slightly when repayment activities kick-in. Separately, we expect GIF ratio to remain at low levels in 1H21 as troubled borrowers can obtain targeted assistance from BIMB; however, this may mask actual damage and lead to a lag in NPL formation if the situation does not improve swiftly. As such, BIMB is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively. As for its Takaful business, it is well positioned to ride the Islamic finance wave and positive structural industry dynamics, in the longer-term.

Forecast. We Raise FY20-22 Profit Forecast by 7-9% to Factor in Lower Cost of Funds.

Raise to BUY (from Hold) and higher GGM-TP of RM4.15 (from RM3.55), following our profit revision and based on 1.08x FY21 P/B (from 0.93x) with assumptions of 10.8% ROE (from 10.2%), 10.2% COE (from 10.7% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is below its 5-year average of 1.28x but ahead of the sector’s 0. 85x. The discount/premium is fair given its ROE output is 5ppt/2ppt beneath/above its 5-year/industry mean. We turn positive on BIMB given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the battle against the virus; this would spur a faster economic recovery, owing to improve business & consumer confidence along with more lenient safety distancing measures. Also, it alleviates strain on businesses, which in turn curbs NPL formation.

Source: Hong Leong Investment Bank Research - 1 Dec 2020