Period

2Q15/1H15

Actual vs. Expectations

BIMB’s 1H15 earnings of RM265.6m (+4.9 YoY) was within our and consensus expectations, representing 48% and 49% of respective full-year forecasts. The in line performance was due to double-digit growth in loans aided by flat overhead expenses.

Dividends

An interim DPS of 5.3 sen/share (vs our expectations of 7.0 sen/share) was declared.

Key Results Highlights

1H15 vs. 1H14, YoY

On a consolidated basis, net earnings growth of 4.9% was boosted by (i) higher total income (+5.4%) and (ii) flat overhead expenses. However, its financial performance could have been better if not for a spike in the provision for bad loans (+68.5%).

Islamic banking business  In-line with the uptick in income from investment of depositors and shareholders’ fund (+3.9%), PBT grew by 4%.  Net financing margin (NFM) was lower by 11bpts at 2.25% (vs. our expectations of -9bpts) bucking the industry trend of 2.20%.  Gross financing and advances (F&A) continued to grow at a rapid pace of 18.4% (vs. ours at +12%) while deposits expanded 13.1% (vs ours at +7%). On an annualised basis, F&A and deposits grew at 8.5% and 5.3%, respectively (1H14: +15.3% and +2.8%). Financing-to-deposit (FDR) was lifted to 74% from 71%.  F&A growth was driven by the individual loans growth at 17.9% (1H14: +24.3%) and domestic business enterprises at growth 12.3% (1H14: +17.2%). The domestic business enterprises make up almost 20.4% of total F&A.  Current account & savings account (CASA) inched up 4.4%, making up 33.8% of total deposits (- 2.8ppts) compared to the Islamic Banking industry ratio of 24.8%.  Asset quality showed some weakness as gross impaired financing ratio (GIF) increased 3bpts to 1.18% but lower than Banking System’s ratio of 1.62%. Annualised credit charge ratio rose by 10bpts to 0.37% vs our expectations of 0.25%.

Takaful business  PBT rose 11.6%, thanks to (i) higher net earned contribution (+6.3%), (ii) lower opex (-100%) and (iii) smaller surplus attributable to takaful operator/participants (-35%).

At group level, cost-to-income ratio (CIR) improved 3ppts to 53% (vs. our expectations of 55.4%) as total income increased 5.4% while opex was flat.

Annualised ROE fell 2ppts to 17% due to larger equity base (which is inline with our expectation of 17%).

CET1, Tier 1 declined by about 60bpts to 12.3%, but capital ratios increased by 40 bpts to 14.3%.

2Q15 vs. 1Q15, QoQ

Net profit fell 4.3% on the back of (i) declining net income by 8.4% from Takaful business and (ii) higher financing cost of by 18.7%.

NFM contracted 7bpts given stiff price-based competition in the market.

FDR fell by 80bpts to 74% as deposits grew faster than F&A (+4.3% vs. +3.2%).

CIR nudged up 2ppts to 54% as total income (-1.4%) decelerated vs. higher opex (+1.4%).

Asset quality improved as (i) GIF decreased 2bpts to 1.18% and (ii) credit charge fell by 8bpts.

Outlook

We do expect F&A growth to taper on the back of the challenging economic conditions. Thus, we are maintaining our FY15 financing growth estimate of 12% (1H15: +18%) and for FY16 we nudged up by 2ppts to 12.0% (previously +10.0%). We also maintained our conservative deposit growth of 7% for FY15 (1H15: +13.1%) and for FY16 we nudged it by 2ppts to 7.0% (from 5% previously).

NFM is maintained at 2.37% (1H15: 2.25%) given the stiff price-based competition for financing and deposits in the market. For FY16, we still maintained it at 2.33%.

To err on the conservative side, we still assumed FY15 CIR at 55% (1H15: 53.3%). Since CIR still trending downwards, we revised our CIR for FY16 by -1ppts to 54%.

As for asset quality, it should remain stable in FY15 as banks continue to seek out new, creditworthy customers. Thus, no change in FY15 credit cost of 25bpts (1H15: 37bpts). FY16, credit cost is nudged by +7bpts

Change to Forecasts

Since the 1H15 results were within expectations, we make no changes to our FY15E earnings of RM548m. However, as we revised up our FY16 F&A growth and lowered CIR estimates, our FY16 earnings is higher (+0.8%) at RM583m (from RM567m previously).

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 RM4.20 (vs. RM4.06 previously). This is based on 1.78x FY16E P/B (previously 1.73x FY16E P/B); we utilised (i) COE of 10.1% (unchanged), (ii) FY16 ROE of 15.6% (previously FY16 ROE of 15.2%), and (iii) terminal growth rate of 3% (unchanged).

The higher P/B multiple is to reflect higher growth and slightly stronger 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 - 15 Sep 2015