Period  2Q14/1H14

Actual vs. Expectations BIMB’s 1H14 net profit of RM253m (+76% YoY) was within our and street’s expectations, accounting for 50% and 48% of respective full-year forecasts.

Dividends  There were no dividends declared (vs. 2Q13: 3.5 sen) as management proposed to undertake a dividend reinvestment plan (DRP). This is in attempt to strengthen its capital position while rewarding shareholders.

Key Results Highlights

1H14 vs. 1H13, YoY

 By acquiring the remaining 49% stake of its subsidiary, Bank Islam, BIMB’s net profit surged strongly (+76%) on the back of lower minority interest (-77%). However, at PBT level, it was flat.

 Islamic Banking business. PBT in this segment nudged up 4% on the back of robust business activities. Gross financing and advances grew 23% vs. deposits growth of 10%. In turn, this lifted its loan-to-deposit ratio (LDR) to 71% from 63%. Notably, this phenomenon did not negatively impact net interest margin (NIM) which instead expanded 11bpts. Loan growth came mainly from the household sector (+25%) while for deposit, current account & savings account (CASA) grew 9%.

Accordingly, CASA as a percentage of total deposit remained at 37%. Asset quality indicators were healthy as gross impaired loan and gross loan loss provision contracted 22bpts and 18bpts, respectively. As a result, loan loss coverage (LLC) increased to 180% (+16ppts). That said, credit charge ratio ballooned 24bpts. This was not surprising as we have pointed out in our earlier reports that the low credit cost trend was not sustainable over the long-run.

 Takaful business. PBT expanded 23% as claims ratio fell 2ppts coupled with the decline in management expenses (-15%) and expense reserves (-43%). That said, overall net earned contributions fell 18%. This was mainly due to the dip in both Family Takaful and General Takaful businesses (-22% and -3% respectively).

 At group level, total income grew 6% while opex fell 1%, resulting its cost-to-income ratio improved to 56% from 60%.

 In tandem with bottom-line growth, ROE spiked up to 17% from 14%.

 CET1, Tier 1 and total capital ratios improved by about 50bpts to 13%, 13% and 14% respectively.

2Q14 vs. 1Q14, QoQ

 Quarterly earnings ticked up by 5% on the back of lower opex (-5%).

 NIM expanded 12bpts.

 LDR was unchanged at 71% as loan and deposit accelerated at similar pace (+5%-6%)

 CIR contracted 3ppts to 55% as personnel and other overhead expenses fell 5% and 8% respectively.

 Positive asset quality indicators. Loan loss coverage increased to 180% (+4ppts) as gross impaired loan ticked down by 2bpts while gross loan loss provision was flat.

Outlook  Our previous view is intact.

 We believe growth rate of gross financing and advances will likely moderate as system loan growth has also tapered. Our low-teen financing growth estimate is maintained.

 Given the imminent change in rulings on Mudharabah and Wadiah accounts, we expect customer deposit to grow slower.

For now, we maintain our 10% growth assumption.

 We foresee NIM being compressed as result of a change in rulings imposed on the two deposit accounts mentioned above. Hence, we have factored in a NIM decline of 30bpts/10bpts for FY14/FY15.

 To be conservative, we have assumed CIR to come in at 57% for the next two years, although it is still trending downwards.

 Furthermore, we have assumed credit cost to normalise in FY14/FY15 as we have factored in a credit charge ratio of 16bpts for both years (vs. writebacks/reversal of 7bpts in FY13). This represents a simple average for the past two financial years.

Change to Forecasts   No change to our forecasts. We maintain our FY14/FY15 net profit estimates of RM511m/RM567m, respectively.

Rating Downgrade to MARKET PERFORM (from OUTPERFORM) given the recent run-up in its share price.

Valuation    Our TP is unchanged at RM4.55 based on 1.9x FY14 P/B.

Risks to Our Call    Further margin squeeze from tighter lending rules and stronger-than-expected competition domestically.

 Slower-than-expected loan growth and deterioration in asset quality.

 Rising credit charge as result of an up-cycle in non-performing loan (NPL).

Source: Kenanga