Period     1Q13/3MFY13

Actual vs.  Expectations     The 1QFY13 PAT of RM74.1m (+14.2% YoY) was within the consensus forecast (24%) and that of ours (23%). 

Dividends    No dividend was declared during the quarter.  

Key Result Highlights     YoY, the 1Q13 fund-based incomes of RM266.5m grew 7.8% thanks to a strong financing growth of 37% to reach a total financing portfolio of RM20.9b driven by ETP-related financings. The growth rate was above our forecast of 15%. BIMB’s deposit has continued to expand at a fast pace to 34.5%. Its financing-to-deposit ratio lowered to 56.6%, down from 59.9% in 4Q12.    

QoQ, the 1Q13 fund-based incomes of RM266.5m shrunk marginally by -0.8% due mainly to the narrowing  financing margin by 20bps to 2.47% on a stronger 11.1% deposit growth as compared to the 4.8% financing growth (QoQ).

We note that the non-fund based incomes were weaker in 1Q13 as they dipped to RM208.1m (-7.4% QoQ and +2.8% YoY) and made up 44% of the total income in the 1Q. Recall that the group had enjoyed stronger fee-based incomes growth in 2H12 that was boosted from the sale of its shareholding in Syarikat Takaful Malaysia with a one-off gain.

We continue to see improving asset qualities in the group with the gross impaired financing amount at RM311.0m and the gross impaired ratio improving to 1.49% (from 1.55% in 4Q12). The financing loss coverage meanwhile hit a new high of 154.0% (vs. 4Q12: 142.6%). 

Due to the weaker revenue, the cost-to-income ratio was higher at 60.0% in 1Q13 vs. 55.4% in 4Q12. 

In summary, the 1Q13 annualised ROE of 14.7% was broadly in line with our estimate of 15.1%.

Outlook    We are still expecting Bank Islam to achieve a higher financing growth target of 15% YoY by end-FY13 with a Financing-to-Deposit ratio of 57%. Its likely higher growth rate than the industry’s 10.4% financing growth rate will mainly come from its financing of ETP-related projects.  We still expect Bank Islam to deliver a faster balance sheet growth from corporate lending and achieve a better asset quality similar to its peers in 2-3  years time.  

Change to Forecasts    There are no changes in our earnings estimates.

Rating  Maintain OUTPERFORM

We believe any potential corporate actions could act as a re-rating catalyst for the group. On the operating  side, we believe its 15% ROE target is highly achievable with the risk on the upside. We also like the stock as its may achieve an asset quality similar to its peers in 2-3 years’ time on a better management of its assets. We expect to see better asset quality as well as earnings visibility from the bank going forward. A progressive reduction in  its credit costs may also boost its profitability.  

Valuation     In line with the current bullish market sentiment, we are raising our target price to RM4.10 (from RM3.90 previously) based on a higher multiple of 1.8x (from 1.7x previously) on its FY14 book value per share of RM2.30

Risks    Tighter lending rules and a margin squeeze.

Source: Kenanga