Period  2Q13/6M13

Actual vs. Expectations  The 1H13 net profit of RM143.7m (+16.8% YoY) was broadly inline the consensus forecast (45.9%) and that of ours (44.7%).

Dividends  Similarly to previous 1H12, it declared an interim NDPS of 3.5 sen (Ex-date: 23/09/13, Entitlement date: 25/09/13, Payment date: 23/10/13).

Key Results Highlights

6M13 vs. 6M12

 The 1st 6 months total income of BIMB was driven by its Islamic Banking business, which accounted for 77.7% of total revenue and 81.7% of PBT.

 The higher income from depositors & shareholders’ funds increased by 11.5% YoY thanks to the growing financing assets that grew 30.3% and 30.7% YoY on both gross and net basis. The slower growth in the fund-based income could be owing compression in net profit rate. We estimated that the net profit rate could decline by 10bps in 1H13 as opposed to 1H12.

 Customer deposit grew at a slower rate of 21.3% YoY. As a result, loan-to-deposit (“LDR”) ratio was higher at 61.6% vs. 57.2% in 1H12. The low cost CASA deposits also increased 6.2% YoY, accounting for 36.7% of the total customer deposits (vs. 41.9% in 1H12). This was higher than the Islamic Banking Industry ratio of 26.6% as at end May 2013.

 While showing improvement, cost-to-income ratio remained sticky at 59.3% vs. 60.5% 1H12.

 The higher PBT of 18.0% YoY was also further boosted by a much lower allowance for financing impairment. The allowance dipped to a mere RM1.6m from RM17.9m in 1H12, representing an annualised credit charge ratio of 1bps and 23bps respectively. We believe the low allowance was attributed to an improved gross impaired financing ratio (1H13: 1.36%, 1H12: 1.55%).

 Takaful business, on the other hand, accounted for 20.5% and 20.6% of the Group’s revenue and PBT, which grew 10.1% and 29.3%, respectively.

 The higher top-lines were attributed to higher sales generated by both Family and General Takaful as well as higher investment income.

 As for the higher bottom-lines growth rate, it was amplified by lower surplus transfer (-19.6% YoY) despite seeing higher net claims ratio of 50.3% (vs. 45.7% in 1H12) and expenses (+12.7% YoY).

 ROE of the Group was registered at a higher rate of 13.3% as opposed to 12.3% in 1H12.

 Capital adequacy was not an issue with Tier 1 and Total Capital Ratios recorded at 12.3% and 3.4%, respectively, as of end-June13.

2Q13 vs. 1Q13

 Net profit declined from RM74.1m in 1Q13 to RM69.6m in 2Q13 despite PBT and Total income grew 12.7% and 7.6%, respectively.

 The deterioration profitability was due to higher effective taxation of 33.8% in 2Q13 as opposed to 25.6% in 1Q13.

 The growth of total income was driven by net income from Takaful business (+11.2% QoQ) due to lower surplus transfer (-23.9% QoQ) as mentioned earlier despite a slower gross (+4.9% QoQ) and net (+6.0% QoQ) earned contributions and higher net claims ratio of 60.5% (vs. 39.7% in 1Q13).

 Income from investment of depositors’ & shareholders’ funds grew slower at 6.4% sequentially.

 While cost-to-income ratio improved faster to 58.3% (vs. 60.3% in 1Q13), this was offset by net allowances of RM2.4m in contrast to writebacks of RM0.8m in 1Q13.

Outlook  In terms of business operations, we still expect Bank Islam to achieve a higher financing growth target of 15% YoY, at least, by end-FY13. In fact, we believe this financing asset growth target is likely to be exceeded judging from the recent set of results. Its higher than the industry financing growth rate of 10.4% will mainly come from its financing of ETP-related projects and corporate lending.

 Besides, we also believe BIMB is able to achieve a better asset quality similar to its peers in 2-3 years time, hence continue to support a low credit charge ratio.

 As for its Takaful business, consensus is looking at 13.6% and 16.5% growth in net profit of Syarikat Takaful Malaysia Bhd, the Takaful arm of BIMB, for FY13 and FY14, respectively.

 Its recent proposed acquisition of the remaining 49% stake in Bank Islam Malaysia should be earnings & ROE enhancing, despite the larger share base and higher cost of funding post acquisition, by plugging minorities’ leakages, in our view (see our Quick Bite Report dated 2 August 2013 for details).

Change to Forecasts   No change in our earnings estimates.

Rating   Maintain OUTPERFORM

Valuation  Our Target Price of RM4.42 remains unchanged.

 The valuation is reasonable as it represents 1.9x PBV to our existing FY14 BPS of RM2.27.

 The 1.9x target PBV implies +1SD above its 4-quarter PBV average. Recall that its average PBV valuation was re-rated to 1.6x in the past 4 quarters from 1.2x a year ago.

Risks  Tighter lending rules and a margin squeeze.

 Turn in NPLs which could lead to higher credit charges.

Source: Kenanga