Period  4Q14/FY14

Actual vs. Expectations  BIMB’s FY14 earnings of RM532m (+91% YoY) was inline with our and street’s expectations, representing 104% of both forecasts.

Dividends  As expected, no dividends were declared – usually, there is a quarter gap before the next dividend is dished out.

Key Results Highlights

FY14 vs. FY13, YoY  Post acquiring the balance 49% stake of its subsidiary, Bank Islam, BIMB’s earnings skyrocketed 91% on the back of lower minority interest (-81%). Whereas, PBT growth was flat.

 Islamic banking business. In tandem with the increase in income from investment of depositors’ and shareholders’ fund (+7%), PBT inched up by 4%. Gross financing and advances (F&A) accelerated at a quicker pace of 24% (vs. Kenanga: +13%) compared to deposits growth of 10% (vs. Kenanga: +10%). Consequently, financing-to-deposit ratio (FDR) was lifted to 74% from 66%. However, net financing margin (NFM) expanded 14bpts (vs. Kenanga: +1bpts), bucking industry trend. F&A growth came primarily from the household sector (+23%) while for deposits, current account & savings account (CASA) ticked up by 8%. Accordingly, CASA as a percentage of total deposits narrowed 90bpts to 38%. As for asset quality, it was intact as gross impaired financing ratio (GIF) fell 4bpts, while financing loss coverage (FLC) was well above the 100%-mark. That said, credit charge ratio rose 29bpts given that: (i) collective assessment allowance was higher coupled with (ii) lower recoveries. To note, 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 8% on the back of lower: (i) net benefits and claims (-13%), (ii) opex (-13%), and (iii) surplus attributable to takaful operator/participants (- 23%). That said, overall net earned contribution fell 13% where both Family and General Takaful businesses saw a decline of 15% and 5%, respectively.

 At group level, total income increased 4% while opex declined 4%. In turn, cost-to-income ratio (CIR) improved to 56% from 60% (vs. Kenanga: +57%).

 Annualised ROE jumped 5ppts to 19%, reflecting its strong bottom-line growth. Essentially, it beat our expectation by 1ppts.

 CET1, Tier 1 and total capital ratios declined by about 70bpts to 12%, 12% and 13%, respectively.

4Q14 vs. 3Q14, QoQ  Quarterly earnings rose 23% on the back of lower loan loss provision (-83%).

 NFM contracted 15bpts given stiff price-based competition to shore up retail deposits.

 FDR was flat at 74% as F&A and deposits grew 8% respectively.

 CIR inched down 1ppts to 55% as opex fell 2% while total income was flat.

 Asset quality remained robust: (i) GIF declined 4bpts, (ii) credit charge came down by 29bpts, while (iii) FLC increased to 3ppts to 170%.

Outlook  We expect the growth of gross financing and advances to taper on the back of weak private consumption trend. Hence, we maintain our low financing growth estimate of 8% for FY15 (vs. FY14: +24%). The slower growth assumption has taken into consideration that its FDR has been inching upwards and thus, management may want to shore up their deposit base first before dishing out more financing.

 Also, we foresee escalating NFM pressure given: (i) stiff price-based competition for financing and deposits in the market plus (ii) the bank will have to reclassify its Mudarabah and Wakalah based demand deposits to become investment accounts; the few repercussions from the change in rulings are: (i) size of its balance sheet may shrink, (ii) higher funding cost, and (iii) additional opex being incurred to maintain these investment accounts. All in, we have factored in a NFM decline of 4bpts for FY15.

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

 Under a rising inflation environment, default rates may climb and exert pressure on asset quality. Thus, we have assumed credit cost to rise in FY15 by factoring higher credit charge ratio of 25bpts (vs. FY14: 22bpts).

Change to Forecasts  Post updating the full set of FY14 financial results into our model, we made some housekeeping adjustments. Our FY15E net profit was nudged up slightly by 1% to RM542m from RM535m. Also, we introduced our FY16 forecasts, where we expect earnings to grow by 4% to RM562m.

 For the next two years, FY15-FY16 ROEs is seen at 15%-17%.

Rating Maintain OUTPERFORM

Valuation  We maintain BIMB’s TP at RM4.72 but we have adopted a different valuation methodology by employing the Gordon Growth Model. Here, we utilised: (i) COE of 9.2%, (ii) FY15E ROE of 17% and (iii) TG of 3%. In turn, we derived a P/B of 2.26x and pegged it to our FY15 BV of RM2.09 (from 2.24x FY15 P/B).

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

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

 Slower-than-expected loans and deposits growth.

 Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Source: Kenanga