BIMB’s 12M16 core earnings of RM559m (+2% YoY) is within expectations, accounting for 95%/98% of our/consensus estimates. Based on management’s guidance, we revised our FY17E earnings and valuation lower. Downgrade to UNDERPERFORM.

Broadly slower. 12M16 core earnings was lower than a year ago (FY15: +7.9%) as both income from investment of depositors and from Takaful business registered single-digit growth for the period at +6.4% YoY and +6.3% YoY, respectively. At the PBT level, Islamic Banking Income improved by 5.1% YoY while the Takaful Business saw higher growth at +8.2% YoY. Growth in Takaful pretax was attributed to: (i) net earned contribution surging by 18.3% but negated by higher net benefits & claims (+26.5%) and higher opex (+11.1%). At the Group level, NIMs improved by 10bps due to better pricing of assets but negated by compression by 16bps in Q4 indicating competition for deposits ahead. However, Cost to Income ratio (CIR) was 50bps lower at 56.2% (vs. industry average of 48.9%) as opex (+5.4% YoY) slower than top-line growth (+6.3% YoY). Financing remained strong at +14.1% YoY (vs. industry’s +5.3% YoY and in line with our estimate). Financing was driven by House & Fixed Assets Financing at +20.9% YoY and Personal Financing at +8.8% (both contributing 65.6% of total portfolio). Deposits were at +5.5% YoY (vs. industry’s +1.5% YoY) but Deposits plus Investment Account surged ahead at +12.4% YoY (vs. our estimate of +2.5%). CASA decline of 7.8% (vs. deposits +5.5%) pushed its ratio to deposits downwards by 5ppts. As financing outpaced deposits, financing-to-deposit ratio (FDR) rose by 6ppts to 87.6%. Asset quality remains resolute despite the challenging environment with Gross Impaired Financing ratio (GIF) falling by 11bps to 0.98% but credit charge surged slightly by 3bps to 0.24% due to slower recovery from corporate accounts. Financing Loss Coverage remains among the best in the industry at 175.4%.

Capital remains adequate with CET1 and CAR at 12.4% and 15.1% well above the regulatory requirements of 7.0% and 10.5%, respectively.

Downward pressure on NIMs ahead. Management is cautious for 2017 with the view that NIMs compression will be wider with competition for longer term deposits (to meet high Net Funding Stability Ratio by 2018 as required by BNM under Basel III). Thus, the strategy for 2017 will be: (i) selective assets growth, (ii) balancing growth and net income, and (iii) defending NIMs. Although it views that Islamic Financing is still in demand, management is adopting a moderate growth target of ~8% for FY17 in order to defend its NIMs margin. Management expects stable asset quality with credit costs for 2017 at 25bps. Based on high loan loss coverage of 175%, initial indications from BNM is that its 2018 provisioning is adequate; thus, impact of MFRS9 in 2018 is expected to be mild.

Forecasts earnings toned slightly for FY17E. Our forecast earnings for FY17E are toned down by 3% to RM573m due to the slight revision mentioned below. TP and call revised downwards. Our GGM-TP is revised downwards to RM4.25 (from 4.15). This is based on a 1.65x FY17E P/B (previously 1.78x FY17E P/B) where we utilised: (i) COE of 9.5% (unchanged), (ii) FY17E ROE of 14.1% (15.1% previously) %, and (iii) terminal growth of 2.5% (unchanged). With a potential downside of 8%, we downgrade BIMB to UNDERPERFORM.

Source: Kenanga Research - 28 Feb 2017