Period  3Q13/9M13

Actual vs. Expectations The 9M13 net profit of RM219.2m (+19.3% YoY) was below the consensus forecast of RM310.0m (70.8%) and ours of RM321.2m (68.2%).

Dividends  No (interim) dividend was declared for the financial quarter.

Key Results Highlights

9M13 vs. 9M12

 The 9M13 months total income of BIMB grew 6.8% YoY driven by net income from Takaful business, which grew 11.7% YoY and accounted for 26.7% of its total income. We understand that the better income from Takaful was attributable to higher net wakalah fee income and higher sales generated by Family Takaful.

 Apart from this segment, non-fund based income also driven by foreign exchange transactions as well as fees and commission.

 Income from depositors merely grew 1.3% YoY, even as the Group registered gross & net financing growth rates of 26.5% & 26.6% YoY. We reckon that such lacklustre fund based income was due to further contraction in profit rate by approximately 39bps YoY based on our estimate. As for lending direction, we notice that the Group continued to focus on household segment, which accounted for c.75% of the total loans and grew by c.26% YoY.

 Customer deposits reported a YoY growth of 14.3%. While the low-cost current and savings accounts (“CASA”) merely increased by 2.8% YoY, the CASA ratio (to customer deposits) stood at 35.4% as at end September 2013, which was much higher than the Islamic Banking Industry ratio of 25.8% as at end-Aug13. Nonetheless, this ratio was lower vis-à-vis 39.3% in 3Q12 and 36.7% in 2Q13.

 Despite the moderate top-lines growth, the PBT & net profit of the Group, however, managed to grow 15.4% & 19.3% YoY, respectively. The higher profitability was mainly achieved on the back of lower allowances for impairment on financing and advances, investment and other assets, as well as the non-recurrence of provision

for contingent liability (-52.4% YoY). Effectively, the annualised credit charge ratio only registered at 10bps in 9M13 as opposed to 28bps in 9M12.

 Asset quality continues to improve with a gross impaired financing ratio of 1.39% as at end-Sept 13 (vs. 1.36% as at end-Jun13 and 1.97% as at end-Sep12). This is in line with the Banking Industry average of 1.4%.  Cost-to-income (“CTI”) ratio remained sticky at 58.9% vs. 58.4% for 9M12.

 Total capital ratio of Bank Islam Malaysia Bhd (computed in accordance to CAFIB-Basel III with effect from early-Jan13) remained healthy and supportive at 14.2% vs. industry average of 14.4%).

 Annualised ROE of the Group increased to 14.1% as opposed to 12.9% in 9M12.

3Q13 vs. 2Q13

 Total income declined 1.8% QoQ. We notice that all income lines have deteriorated, ranging from -0.4% QoQ to 5.7% QoQ.

 Coupled with higher allowances for impairment on financing and advances of RM14.5m (+502.7% QoQ) with an effective annualised credit cost of 26bps (vs. 7bps in 2Q13), PBT declined 7.7% QoQ.

 However, the net profit was able to register an 8.4% QoQ growth due to lower effective taxation of 27.4% in 3Q13 in contrast to 33.8% in 2Q13 while effective minority interest increased slightly to 34.2% (to PBT) from 33.5% in 2Q13.

 CTI ratio remained flat at 58.2% in 3Q13 vs. 58.3% in 2Q13.

Outlook  The banking Group has shown some signs of weakness during the quarter. Hence, we see risk of revising down our earnings estimates. However, the acquisition of the remaining 49% stake in Bank Islam should easily boost its net earnings by >RM200m in FY14 due to lower minority interest at Bank Islam level.  Thus far, the banking group has completed its 1:2 rights issuance. A total of 426.7m new shares were issued, bring up its total share base to 1,493m (from 1,067m previously).

 It is expected that the acquisition will be completed by end-Dec 13 while waiting for the completion of its 10-year Sukuk issuance of c.RM1.4b.

 In terms of business operations, we expect lower loans growth going forward after its strong double-digit growth for this year. Besides, we also believe the banking group could be less aggressive in promoting deposit growth due to its comfortable LD ratio of 64%. Our loan and deposit growth rate assumptions are 21.4% & 5.7% and 16.2% & 0.3% for FY13 and FY14, respectively. CTI ratio could remain sticky at around 55.6% and 54.1% for FY13 and FY14. We also believe credit cost to increase in FY14, hence our credit ratio assumption of 30bps vis-à-vis 10bps for FY13.

Change to Forecasts    We have revised lower our FY13 net profit (-7.5%) from RM321.2m to RM297.1m (+17.8% YoY) by factoring lower net profit rate and slower top-line growth.

 However, we have revised up (+57.1%) our FY14 net profit to RM542.8m (+82.7% YoY) from RM345.6m to account for lower minority interest. Note that we assume the acquisition of the remaining 49% minority stake of Bank Islam to be completed by end-Dec13.

Rating Downgrade MARKET PERFORM due to unexciting 5% upside from here.

Valuation  We believe the share price could have already priced in the positive impact of minority interest acquisition, as it is trading at 22.7x to our revised FY13 EPS of 20.0sen or 1.7x to our F13 BPS estimate of RM2.71. These valuations seem stretched with a relatively low FY13 ROE of 9.8%.

 Hence, we believe the PBV multiple may normalise to 1.6x, which is the four-quarter PBV average.

 Based on this target PBV and our FY14 BPS estimate of RM2.96, we revised our Target Price (TP) to RM4.74 (from RM4.42 previously), implying a FY14 PER of 13.0x, which is in-line with the industry average.

Risks to Our Call     Tighter lending rules and a margin squeeze.

 Turn in NPLs which could lead to higher credit charges.

Source: Kenanga