1Q16 core earnings of RM135m were within expectations, accounting for 23%/24% of ours/consensus estimates. No dividends announced as expected. We expect BIMB to be in a defensive stance in FY16 safeguarding asset quality due to the challenging economy. No change in our forecast earnings and MARKET PERFORM call is maintained. However, we lower our TP to RM4.18 (from RM4.30 previously) on a lower P/BV target.

1Q16 net profit was within expectations, but bottomline fell marginally by 0.3% attributed to higher impairments and opex.

3M16 vs. 3M15, YoY

• Total income improved by 9% (3M15: +6%) bolstered by growth in: (i) net income from takaful business at 9% (3M15: 10.0%), and (ii) income from investment of depositors & shareholders’ funds at 9% (3M15: +4%).

Islamic banking business

• PBT improved marginally by +0.8%.
• Net Financing Margin fell by 3bps to 2.3%.
• Gross financing and advances (F&A) grew stronger at +17% (3M15: +21%) vs. our expectations of +12% against deposits decline of 3% (3M15: +15%) which led to financing-to-deposit ratio (FDR) surging by 15ppts to 90%. We anticipated deposit growth of +5.5%.
• Current account & savings account (CASA) rose 1ppts to 37% of total deposits but still above the Islamic Banking industry’s CASA ratio of 25%.
• Asset quality showed improvement as gross impaired financing ratio (GIF) decreased 26bps to 0.94%, lower than the Banking System’s ratio of 1.6%. Annualised credit charge ratio fell by 1bps to 0.41% vs our expectation of 0.25%.

Takaful business

• PBT declined by 6%, attributed to: (i) drop in other income (-18%), and (ii) higher opex (+30%) despite net earned contribution surging by 21%.
• At the group level, CIR rose 3ppts to 56% against our expectation of 54% (vs. industry’s 49%) as opex outpaced total income by +7%.
• Annualised ROE fell by 2ppts to 16% (lower than our estimates of 17%).
• CET1, Tier 1 was flat at 12%, but capital strengthened by 2ppts to 15.2%, still well above the regulatory level of 8.5% (CET1) and 10.5% (Total Capital).

1Q16 vs. 4Q15, QoQ

• Net profit declined by 16% on the back of: (i) higher impairments at RM35m (+85%), and (ii) higher tax rate at 28% vs. 11% in 4Q15.
• NFM was higher by 14bps to 2.3%.
• FDR rose by 9ppts to 90% as F&A advanced faster than deposits (+3% vs. -7%).
• CIR was lower by 4ppts to 56% as total income (+0.2%) outpaced opex (-7%).
• Asset quality was mixed as: (i) GIF decreased 13bps to 0.94% but credit charge was at 0.41% vs. 0.23% in 4Q15.
• Financing loss coverage (FLC) was up by 25ppts to 200%.

Outlook. We expect BIMB to be in a defensive stance in FY16 safeguarding asset quality due to the challenging economy. We maintain a financing growth estimate of 12% YoY for FY16 despite the better than 1Q16 growth of 17% as management strives to maintain a FDR target of 80% (1Q16: 90%). Thus, we expect NFM to compress to 2.2% for FY16. (1Q16: 2.3%). We thus maintained our assumptions for FY16E/FY17E with (i) financing growth at 12% for both FY16E/17E; (ii) deposits & IA growth at 5.5%/5.0% for FY16E/17E; (iii) credit charge ratio of 0.25% for both FY16E/17E; and (iv) NFMs compression by 10bps to 2.2% for FY16E/FY17E as we expect stiff price-based competition to linger.

No change in Earnings Forecasts. Earnings forecasts are left unchanged as the results were within expectations.

TP lowered as we roll over to FY17E and MARKET PERFORM maintained. Our GGM-TP is now at RM4.18 (vs. RM4.30 previously).

This is based on 1.8x FY17E P/B (previously 1.9x FY16E P/B) where we utilised: (i) COE of 9.6% (previously 10.1%), (ii) FY17E ROE of 14.9 % (previously FY16E ROE of 16.6%), and (iii) terminal growth rate of 2.5% (unchanged). Its valuation is already expensive with a 1.8x P/BV against peers’ P/BV of 1.5X; thus, we maintain Market Perform.

Risks to our call are: (i) Steeper margin squeeze from tighter lending rules and stronger-than-expected competition; (ii) Higher -thanexpected financing and deposits growth and; (iii) Higher-than-expected rise in credit charge as result of a potential up-cycle in nonperforming loan (NPL).

Source: Kenanga Research - 12 May 2016