Period

1Q15

Actual vs. Expectations

BIMB’s 1Q15 earnings of RM136m (+10% YoY) was within our and consensus expectations, representing 25% of respective full-year forecasts.

Dividends

As expected, no dividends were declared.

Key Results Highlights

1Q15 vs. 1Q14, YoY

On a consolidated basis, net earnings (+10%) was boosted by: (i) higher total income (+6%) and (ii) lower general expenses (-48%). However, its financial performance could have been better if not for a spike in the provision for bad loans (+83%).

Islamic banking business  In-line with the uptick in income from investment of depositors’ and shareholders’ fund (+4%), PBT grew 4%.  Net financing margin (NFM) was flat at 2.32% (Kenanga: -9bpts, Mgmt: -13bpts), bucking industry trend.  Gross financing and advances (F&A) continued to grow at a rapid pace of 21% (vs. Kenanga: +12%, Mgmt: +15%) while deposits expanded 15% (Kenanga: +7%, Mgmt: +10%). In turn, financing-todeposit (FDR) was lifted to 75% from 71%.  F&A growth was boosted by the household sector (+21%) while current account & savings account (CASA) inched up 4%, making up 36% of total deposits (-4ppts).  Asset quality showed some weakness as gross impaired financing ratio (GIF) increased 3bpts while credit charge ratio rose 14bpts.

Takaful business  PBT rose 35%, thanks to: (i) higher net earned contribution (+10%), (ii) lower opex (-9%), and (iii) smaller surplus attributable to takaful operator /participants (-25%). To note, the 10% increase in net earned contribution came mainly from the Family Takaful business, which grew 14%.

At group level, cost-to-income ratio (CIR) improved 5ppts to 53% (Kenanga: 55%, Mgmt: 55%) as total income increased 6% while opex declined 3%.

Annualised ROE fell 2ppts to 18% due to larger equity base, generated from its dividend reinvestment plan (Kenanga: 17%).

CET1, Tier 1 and total capital ratios declined by about 80bpts to 12%, 12% and 13%, respectively.

1Q15 vs. 4Q14, QoQ

Net profit fell 12% on the back of: (i) a 7-fold increase in allowance for bad loans, and (ii) higher effective tax rate of 30% (4Q14 was at 26% due to the reversal of over provisioning for tax in prior years).

NFM contracted 4bpts given stiff price-based competition in the market.

FDR ticked up 1ppts to 75% as F&A grew a tad faster than deposits (2% vs. 1%).

CIR nudged down 2ppts to 53% as total income (+8%) accelerated at a quicker pace vs. opex (+3%).

Asset quality weakened as: (i) GIF increased 6bpts, and (ii) credit charge rose 36bpts.

Outlook

We expect F&A growth to taper on the back of weak private consumption trend. Thus, we are retaining our FY15 financing growth estimate of 12% (Mgmt: +15%, 1Q15: +21%). Furthermore, management had guided its FDR to hit 80% (Kenanga: 78%, 1Q15: 75%) on the back of 10% deposits growth (Kenanga: +7%, 1Q15: +15%)

NFM pressure is inevitable given stiff price-based competition for financing and deposits in the market. Hence, we have factored in a NFM decline of 9bpts for FY15 (Mgmt: -13bpts, 1Q15: -1bpts)

To err on the conservative side, we have assumed FY15 CIR to come in at 55% (Mgmt: 55%, 1Q15: 53%), although it is still trending downwards.

As for asset quality, it should remain stable in FY15 as banks continue to seek out new, creditworthy customers. However, we believe that there will be an up-cycle in credit cost given that most of the bad legacy business loans were already restructured or recovered last year. Thus, we have assumed FY15 credit cost to rise i.e. by factoring higher credit charge ratio of 25bpts (1Q15: 42bpts).

Change to Forecasts

Since the 1Q15 results were within expectations, we make no changes to our FY15E/FY16E earnings of RM549m/RM567m.

Rating

Maintain MARKET PERFORM

Tapering growth prospects is a drag to share price performance. Nevertheless, BIMB is still the only listed Shariahcompliant banking stock on Bursa and it offers decent yields of ~4%.

Valuation

We arrive at a new GGM-TP of RM4.06 (previously RM4.24) as we rollover our valuation to FY16. This is based on 1.73x FY16E P/B (previously 2x FY15E P/B); we utilised (i) COE of 10.1% (unchanged), (ii) FY16 ROE of 15.2% (previously FY15 ROE of 17.1%), and (iii) terminal growth rate of 3% (unchanged).

The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected financing and deposits growth.

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

Source: Kenanga Research - 27 May 2015