Period  4Q13/12M13

Actual vs. Expectations The FY13 net profit of RM255.6m (+1.3% YoY) was below consensus estimate of RM310.0m and our forecast of RM297.1m. The reported net profit accounted for 82.5% of consensus and 86% that of ours although it was still able to deliver decent PBT of RM833.1m (+16.1% YoY), which was 3.5% ahead of our PBT forecast of RM805.2m.

 The lower profitability was due mainly to higher taxation in the final quarter. In 4Q13, tax expenses jumped ~121% QoQ or ~105% YoY, registering an effective taxation rate of 50.9% (vs. 27.4% in 3Q14 and 30.1% in 4Q12).

 This is mainly attributable to the increase in tax charged on the higher dividend income received from Bank Islam (as such income is required to be eliminated upon consolidation as intercompany transaction) in 2013, resulting in an incremental tax of RM31.9m.

 Adding back this incremental tax, the FY13 net profit of BIMB would be restated at RM287.5m, which would then be within expectations.

Dividends  No dividend was declared, which is a surprise. As such, the Group had only paid an interim dividend 3.5 sen/share for the financial year in contrast to our estimate of 6.0 sen.

Key Result Highlights

FY13 vs. FY12

 FY13 total income grew 8.2% YoY driven by net income from Takaful business, which grew 17.1% YoY, which accounted for 27.1% of its total income, and income from investment of shareholders’ fund which increased 15.6%. We understand that the better income from Takaful was attributable to higher net wakalah fee income, higher sales generated by Family Takaful and better investment results.

 Vis-à-vis income from investment of shareholders’ fund, net income from investment of depositors’ fund only grew marginally at 1.7%. The main reason for this is due to new rulings dealing with Mudharabah and Wadiah deposits. In a nutshell, the new rulings have pushed the cost of deposits funding higher and making it more restrictive to attract depositors. Hence, net profit rate has seen a sharp decline. Based on our estimate, net profit rate contracted by approximately 35bps YoY.

 For further illustration, income from investment of depositors’ fund grew 12.2% YoY but this was eroded by much higher income attributable to depositors of 30.9% YoY. As a result, net income from investment of depositors’ fund merely grew 1.7% even as the Group managed to achieve gross & net financing growth rates of 21.5% & 21.7% YoY. As for lending direction, we notice that the Group continued to focus on household/individual segment, which accounted for c.75% of the total loans which grew by c.24.1% YoY. While SME financing also saw a strong growth of 27.9% YoY, it merely accounted for 3% of the total gross financing.

 Customer deposits reported a YoY growth of 14.0%. While the low-cost current and savings accounts (CASA) grew at a slower rate at 7.8% YoY, the CASA to customer deposits ratio remained high at 39.2% as at end-Dec 13, much higher than the Islamic Banking Industry ratio of 25.9%. Nonetheless, this ratio was slightly lower vis-à-vis 41.4% as at end-Dec 12. Loan-to-deposit ratio (LDR) has increased to 65.7% in end-Dec 13 as compared with 61.6% in end-Dec 12. The higher ratio is desired to mitigate the squeeze in profit margins.

 Cost wise, operating expenses grew 11.1% YoY. As a result, cost-to-income ratio (CIR) increased to 59.5% from 57.9% in FY12.

 The higher cost impact was, however, mitigated by writebacks/reversals of impairment of RM15.0m as opposed to RM66.1m allowances for impaired loans in FY12. While we are concerned over the sustainability of the trend of historical low credit cost, the Group’s asset quality seems to have improved further. Gross impaired financing ratio stood at 1.18% as at end-Dec 13 as opposed to 1.55% as at end-Dec 12. The asset quality is proven better that the Islamic banking system gross impaired ratio that was recorded at 1.9% as at end-Dec 13. Loan loss coverage (LLC) reserve was also high at 175.8% as at end-Dec 13 (vs. 142.6% as at end-Dec12).

 Total capital ratio of Bank Islam Malaysia Bhd (computed in accordance to CAFIB-Basel III with effect from early-Jan 13) remained healthy and supportive at 14.1% (vs. 14.0% in FY12).

 FY13 ROE of the Group declined to 11.6% as opposed to 13.1% in FY12 due to: (i) higher taxation and (ii) larger shareholders’ fund post rights issuance.

4Q13 vs. 3Q13

 Despite a decent growth of 5.3% QoQ in total income coupled with writebacks/reversals of impairment of RM31.1m in 4Q13, net profit of the Group declined substantially by 51.7% QoQ due mainly to higher effective tax rate of 50.9% in 4Q13 (vs. 27.4% in 3Q13) (see the above section for details).

Outlook  With the changes in rulings that deal with Mudharabah and Wadiah deposits, we believe the customer deposits are like to grow slower than the growth rate of 14.0% in FY13. Besides, Islamic Banks may see further compression in net profit rate arising from the changes of new rulings. As such, we only factor in 10% growth in customer deposit for both FY14 and FY15. Net profit rate from Investment Depositors' Fund is expected to further contract by 30bps in FY14 and to be followed by another 10bps in FY15.

 Due to the lower deposits funding and coupled with the underlying trend of moderation in financing growth, particularly in household segment, we only factored in 13.1% and 10.2% growth rates in gross financing for FY14 and FY15. We believe these estimates are conservative as opposed to its FY13 growth rate of 21.5%.

 We have also factored in a sticky CIR scenario in our forecast by employing a 2-year average CIR of 60.0% for FY14-FY15 (vs. 59.0% for FY13).

 Besides, we also assume credit cost to normalise in FY14 and FY15. We have priced in a credit charge ratio of 16bps each for these two financial years (vs. writebacks/reversal of 7bps in FY13). This credit charge ratio represents a simple average for the last two financial years.

 We also adopted a much higher effective tax rate of 32.9% for FY14 and FY15. Again, this effective tax rate is the mean value for the last two years.

 However, effective minority interest rate is expected to drop substantially to 8%-9% for FY14 and FY15 (vs. 34.1% in FY13) after the completion of acquisition of the remaining 49% minority stake.

 As for dividend payout, we have lowered our assumptions from 30% to 25% for now.

Change to Forecasts Based on the above-mentioned conservative assumptions and expectations, we have revised our FY14 net profit estimated lower to RM510.5m (+99.7% YoY) from RM542.8m previously, representing a -5.9% revision. We also introduce our FY15 net profit estimate of RM566.7m (+11.0% YoY).

 With a larger share base post rights issuance, FY14 and FY15 EPSs are forecasted at 34.2 sen and 37.9 sen. Furthermore, based on our assumed average 25% dividend payout ratio, DPS is expected at 9.0 sen each for the next two years.

 ROE is expected to be registered at 17.6% and 17.1% in FY14 and FY15, respectively.

Valuation  By pegging the 3-year average PBV of 1.7x and 3-year average PER of 16.2x to our FY14 estimates, we value BIMB at RM4.55, on average. At this target price, it implies a FY14 PBV of 2.2x and PER of 13.3x.

Rating  While the changes in new rulings are not in Islamic Banking favour for now, we see value. This is especially true as the stock price has declined >10% since our downgrade in late-Nov13. Despite our lower TP of RM4.55 (vs. RM4.74 previously), the stock still offers >13% upside from here, in our view. Hence, we upgrade our rating to OUTPERFORM from MARKET PERFORM.

Risks to Our Call    Tighter lending and deposit taking rules causing further squeeze in profit rate.

 U-turn in NPLs which could lead to higher credit charges.

Source: Kenanga