BIMB’s 2Q21 core earnings fell 9% QoQ due to higher financing loss provision, finance cost from sukuk liabilities, and effective tax rate. Also, financing growth lost traction. However, NFM expanded QoQ and GIF ratio remained flat. Overall, results were below expectations and thus, we cut FY21-23 earnings by 11-14%. Despite the earnings miss, we still like BIMB for its positive long-term structural growth drivers and better asset quality among smaller-sized banks. Retain BUY but with lower GGM-TP of RM4.80 (from RM5.20), based on 1.16x FY22 P/B.

Below expectations. Excluding 2Q20’s modification loss, BIMB registered 2Q21 core bottom-line of RM185m (-9% QoQ, -18% YoY), bringing 1H21 sum to RM387m (-11% YoY). This was below expectations, making up 44-49% of our and consensus full-year forecasts; key variances were softer-than-expected top-line and higher-than-expected finance cost incurred for sukuk liabilities. Also, we see allowances for bad financing to creep up in subsequent quarters due to Covid-19 lockdowns.

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

QoQ. Higher loan loss provision (tripled), finance cost from sukuk liabilities (doubled), and effective tax rate, dragged down core profit by 9%. That said, positive Jaws from the drop in opex (-7%; broad base across all cost items) vs total income growth of 2%, helped to cushion overall decline. Net financing margin (NFM) widened 5bp.

YoY. Core earnings fell 18%, again due to higher bad financing allowances (+30%), finance cost from sukuk liabilities (doubled), and effective tax rate. However, the drop in bottom-line was steeper given opex growth outpaced total income by 8ppt.

YTD. The decrease in core profit (-11%) was no thanks to negative Jaws (opex grew 8% vs total income of 3%) and higher finance cost from sukuk liabilities (+61%).

Other key trends. Both financing and deposit growth lost momentum to 6.3% (1Q21: +9.6%) and 6.6% YoY (1Q21: +11.3%) respectively. In turn, financing-to-deposit ratio (FDR) nudged down 1ppt QoQ to 92%. As for asset quality, gross impaired financing ratio remained flat sequentially at 0.72%.

Outlook. For Islamic Banking, we see NFM to come under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion. That said, financing growth is expected to taper before recovering again from gradual economic reopening under the National Recovery Plan. Separately, GIF ratio is likely to creep up but we are not overly worried as BIMB has made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the elevated NCC assumption applied for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Besides, we believe the Government & BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIF ratio. As for its Takaful business, it is well positioned to ride the Islamic finance wave & positive structural industry dynamics, in the longer-term.

Forecast. Since 2Q21 results missed estimates, we cut FY21-23 earnings by 11-14% to account for weaker top-line and higher finance cost from sukuk liabilities.

Retain BUY but with lower GGM-TP of RM4.80 (from RM5.20), following our cut in profit. The TP is based on 1.16x FY22 P/B (from 1.23x) with assumptions of 10.6% ROE (from 12.1%), 9.6% COE and 3.0% LTG. This is largely in line to its 5-year mean of 1.21x but ahead of the sector’s 0.88x. The premium is warranted given its ROE generation is 1ppt above industry average. We still like BIMB for its positive long-term structural growth drivers and better asset quality among smaller-sized banks.

Source: Hong Leong Investment Bank Research - 1 Sept 2021