Period  1Q14

Actual vs. Expectations  The reported 1Q14 net profit of RM123.5m (+66.5% YoY or >100% QoQ) accounted for 24.2% and 23.3% of our estimate of RM510.5m and consensus forecast of RM530.6m. Hence this set of results was pretty much within expectations.

 The strong surge in net profit while PBT only grew 2.9% was a result of incremental profit contribution from acquisition of the remaining 49% stake in Bank Islam Malaysia Bhd on 19 Dec13. Consequently, minority interest declined substantially by 82.6% YoY or 79.1% QoQ.

Dividends  None, as expected.

Key Results Highlights

1Q14 vs.1Q13

 On a QoQ basis, Total Income of the Group grew 12.9% YoY on the back of 20.7% growth in net income from Takaful business while combined fund based net income from both depositors and shareholders grew 10.1%.

 For Islamic Banking business, the Bank Islam Group recorded a PBZT of RM167m and net profit of RM120.3m. These represented an increase of 11.1% and 9.0%, respectively, mainly attributed to growth in business activities. Gross financing assets grew 21.9% and were way above our conservative expectation of 13.1%. 75% of these financing assets were attributed by individual/household segment, which grew at a faster rate of 23.9%. Based on our estimate, profit rate (or NIM) was quite steady. As at end-Mar14, customer deposits declined marginally by 0.8% while low costcost deposits (CASA) grew strongly to 11.2%. We believe this could be the secret in maintaining its profit rate via: (i) better utilization of funding as loan-todeposit ratio (LDR) improved to 70.9% (from 57.7% in 1Q13) and (ii) low cost of funding via strong CASA, which accounted for 39.7% to total customer deposits (vs. 35.5% in 1Q13).

 As for Takaful business, Takaful Malaysia Group recorded a PBZT of RM44.7m as compared to RM40.2m in the same corresponding period last year. The higher profit was attributable to better investment results despite lower operating revenue of RM432.0m, compared to RM519.0m in 1Q13. In 1Q14, Family Takaful recorded gross earned contributions of RM194.2m against RM273.1m in 1Q13. The decrease in Family Takaful’s gross earned contributions for 3 months period was attributable to lower sales from Group Family products. Nonetheless, we saw lower surplus transfer from Family Takaful (from RM35.5m declined to RM25.4m) due mainly to lower underwriting and investment results. General Takaful, at the same time, recorded gross earned contributions of RM79.6m vs. RM79.2m in 1Q13. In 1Q14, the surplus transfer from General Takaful was RM13.3m as compared to RM10.1m a year ago. The higher surplus transfer was due mainly to lower claims incurred and better investment results.

Key Results Highlight (Con’d)  Nonetheless, the strong growth in the Group’s Total Income was eroded by higher group operating expenses (+7.6% despite recorded an improved cost-to-income ratio of 57.4% vs. 60.3% in 1Q13) and RM16.6m impaired loans allowance as opposed to writebacks of RM0.8m in 1Q13. The annualised 27bps credit cost was not a surprise to us as we always believe that the trend of low credit cost might not be sustainable. Having said that the Group’s gross impaired financing ratio had further strengthened to 1.17% vs. 1.49% in 1Q13. Its loan loss coverage also improved from 154.0% to 175.7%.

 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 13.9% (vs. 13.8% in 1Q13).

 The annualised ROE has improved substantially to 17.3% (vs. 5.9% in 1Q13) inline with lower leakage in minority interest of the Group.

1Q14 vs. 4Q13

 The strong growth in net profit was due to lower minority interest. On a QoQ basis, we saw a 17.1% decline in PBT despite a relatively flat QoQ growth of 1.4% in Total Income.

 The lower PBT was due mainly to a 27bps annualised credit cost as opposed to writebacks of RM31.1m in 4Q13 despite registering a better cost-to-income ratio (CIR) of 57.4% vs. 59.5% in 4Q13.

Outlook  Our view remains unchanged.

 Despite a strong gross financing growth, we still believe the growth rate will be moderating. Our low-teen financing growth estimates are maintained.

 With the changes in rulings that deal with Mudharabah and Wadiah deposits, we also believe the customer deposits are likely to grow slower, which was seen in the quarter under review. Thus far, we still factor in 10% growth in customer deposit for both FY14E and FY15E.

 Besides, further compression in net profit rate arising from the changes of new rulings is likely as well. We have factored in more conservative profit rate compression assumptions of 30bps in FY14E and to be followed by another 10bps in FY15E. despite the Group registered a steady profit rate during the quarter.

 While we saw improved CIR for the quarter, 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.

 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.

Change to Forecasts  No change in our FY14-FY15 net profit estimates of RM510.5m-RM566.7m.

Rating Maintain OUTPERFORM

Valuation  We maintained our Target Price of RM4.55, implying a 1.9x FY15 PBV or 12.0x FY15 PER.

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