Post-meeting with management yesterday, we downgrade BIMB to  MARKET  PERFORM  given  that  its  yield  offerings are  not  as attractive as before. Our newly derived GGM-TP is RM4.24. Keytakeaways  from  the  meeting  were:  (i)  new  IA  guideline  woes were  resolved,  (ii)  looking  to  open  nine  new  branches,  (iii) takaful  business  to  chug  along,  and  (iv)  FY15  guidance  was unveiled.

New  IA  guideline  woes  were  resolved.  Management  shared  that BIMB  is  adhering  to  the  new  Investment  Account  (IA)  guideline. Presently,  only  ~19%  of  its  total  deposits  comprise  of  Mudharabah accounts (vs. 2013: ~62%) where majority of them have already been converted to Tawarruq contracts (2014: ~43% vs. 2013: 0%).

In the mood of expansion. To further gain stride in the local Islamic banking scene, BIMB is looking to open nine new branches, to bring the total branch network to 150 this year. We understand that it will cost ~RM1m in capex to set up a new branch. On regional aspiration, BIMB  may  look  to  make  a  foray  into  Indonesia  under  the  ASEAN Banking Integration Framework.

Takaful  business  to  chug  along. Given  that  the  insurance  and takaful industry is highly competitive, BIMB will notbe revising up the pricing  of  its  general  takaful  products  when  GST  kicks  in. Furthermore,  management  shared  that  the  negative  impact  arising from this is minimal.

FY15  guidance.  Management  unveiled  its  FY15  guidance:  (i) financing growth of 15%, (ii) deposits growth of 10%, (iii) financing-todeposit  ratio  (FDR)  to  hit  80%,  (iv)  cost-to-income ratio  (CIR)  to remain  unchanged  at  ~55%,  (v)  net  financing  margin  (NFM)  to contract  by  ~13bpts,  (vi)  asset  quality  to  remain  stable  (gross impaired financing ratio of <1.5%), and (v) dividend payout (DPR) of at least 50% from net profit.

Forecasts. We  nudged  up  our  FY15/FY16  earnings  forecasts  by 1.2%/0.8%  to  RM549m/RM567m.  This  comes  after  imputing:  (i) higher  FY15/FY16  financing  growth  of  4ppts  to  12%/10%  as  we reckon  that  BIMB  is  capable  to  push  for  slightly  quicker  financing growth given its relatively low FDR of 74%, (ii) lower FY15/FY16 NFM by  5bpts  to  2.37%/2.33%  given  higher  cost  of  funds  from  the switchover  to  Tawarruq  accounts,  as  well  as  (iii)  lower  FY15/FY16 CIR  by  1ppts  to  55%  as  we  were  too  conservative  previously. Notably, we also toned down our DPR assumption to 50% from 60%.

Risks.The key risks are: (i) steeper margin squeeze, (ii) slower-thanexpected financing and deposits growth, as well as  (iii) worse-thanexpected deterioration in asset quality.

Valuation & recommendation. After lowering our DPR forecasts, we find that BIMB’s yield of ~4% is not as alluring as before. Hence, we are  downgrading  BIMB  to  MARKET  PERFORM  (from OUTPERFORM).  Our  new  GGM-TP  of  RM4.24  (from  RM4.72)  is based  on  2x  FY15  P/B  (previously  2.26x)  where  we  employed:  (i) COE of 10.1% (previously 9.2%), (ii) FY15 ROE of 17.1% (previously 17%), and (iii) terminal growth of 3% (unchanged). To further support our new valuation yardstick, we have conducted a Fwd P/B vs. Fwd ROE regression analysis for banks in Malaysia (ex-PBBANK) and the results shows that BIMB should trade at 2x Fwd P/B as well.

Source: Kenanga Research - 25 Mar 2015