Period  3Q14/9M14

Actual vs. Expectations BIMB’s 9M14 earnings of RM378m (+73% YoY) came within our and consensus expectations, making up 74% and 73% of respective full-year forecasts.

Dividends  An interim dividend of 14.7sen was declared (vs. 9M13: 3.5sen), surpassing our expectations given that its annualised dividend payout ratio is at 58% (vs. 9M13: 17%; FY13: 50%). Essentially, the higher payout was vis-à-vis the recently proposed dividend reinvestment plan, in attempt to strengthen its capital position while rewarding shareholders.

Key Results Highlights

9M14 vs. 9M13, YoY After taking over the remaining 49% stake of its subsidiary, Bank Islam, BIMB’s earnings ballooned 73% on the back of lower minority interests (-78%). However, PBT growth was flat.

 Islamic banking business. PBT inched up 6%, thanks to improved income from investment of depositors’ and shareholders’ fund (+10%). Gross financing and advances grew at a faster pace of 21% vs. deposits growth of 7%. As result, loan-to-deposit ratio (LDR) was lifted to 74% from 65%. Despite the commendable increase in both loan and deposit books, net interest margin (NIM) expanded 16bpts. Loans growth came primarily from the household sector (+24%) while for deposits, current account & savings account (CASA) accelerated 15%. Accordingly, CASA as a percentage of total deposits spiked up to 38% (+3ppts). Asset quality was intact as gross impaired loans and gross loan loss provision contracted 21bpts and 24bpts respectively. In turn, loan loss coverage (LLC) increased to 168% (+9ppts). That said, credit charge ratio rose 17bpts. 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 grew 14% on the back of higher administration (+57%) and investment (+4%) income. That said, overall net earned contribution fell 16% where both Family and General Takaful businesses saw a decline of 19% and 7% respectively.

 At group level, total income increased 6% while opex was flat. In turn, cost-to-income ratio (CIR) improved to 56% from 60%.

 Annualised ROE jumped 3ppts to 17%, in tandem with bottom-line growth.

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

3Q14 vs. 2Q14, QoQ

 Quarterly earnings fell 3% on the back of higher loan loss provision (+38%).

 NIM expanded 8bpts given the 25bpts OPR hike in July.

 LDR increased to 74% (+3ppts) as loans grew 4% while deposits growth was flat.

 CIR inched up 1ppts to 56% as personnel expenses grew 6%.

 Asset quality still positive despite gross impaired loans and credit charge ratio ticked up 3bpts and 9bpts respectively. LLC declined 12ppts to 168%.

Outlook  We expect gross financing and advances growth to taper on the back of moderating consumption trend. Our low-teen financing growth estimates were maintained.

 We foresee NIM being compressed as result of: (i) stiff price-based competition for loans and deposits, as well as (ii) a change in rulings imposed on Mudarabah and Wakalah accounts. 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.

 Given rising inflationary environment coupled with the increase in borrowing cost (as a result of the 25bpts hike in OPR on 10 July), delinquency rates may rise and exert pressure on asset quality. Thus, 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 We maintain our FY14/FY15 net profit estimates of RM511m/RM567m respectively.

 However, given the higher dividend payout, we revise upwards our FY14/FY15 DPS by 11sen/14sen respectively. This assumes a 60% dividend payout ratio (from 25%).

Rating Upgrade to OUTPERFORM (from MARKET PERFORM)

Valuation  We raise BIMB’s TP to RM4.86 (from RM4.55) based on a new valuation yardstick of 2.3x FY15 P/B (from 1.9x FY14 P/B). Essentially, we rollover our valuation to FY15 and pegged it to a higher P/B multiple to reflect higher ROE generation moving forward.

 Despite negative headwinds surrounding the banking sector, we like BIMB for its decent yields of 4%-5%. Also, it is the only listed Shariah-compliant banking stock on Bursa and hence, it is able to demand for a scarcity premium from the market.

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