BIMB’s 3M17 core earnings of RM151m (+12% YoY) was within expectations, accounting for 26%/25% of our/consensus estimates. No change to our forecast earnings, thus TP of RM4.54 maintained with a MARKET PERFORM call.

Earnings enhanced by Takaful Business. 3M17 core earnings improved by +11.7% YoY to RM151.12m boosted by lower loans loss provisions (RM8.8m vs 3M16: RM34.6m) as topline revenue grew moderately by +2.2% YoY to RM626.7m. At the PBT level, both Islamic Banking and the Takaful Business saw better performance with improvement in Islamic banking and rebound in Takaful Business at +9.7% YoY and +26.7% YoY respectively (3M16: +0.8% YoY and -5.6% YoY). At the Group level, Net Financing Margins (NFMs) compressed by 10bps to 2.1% as yields fell faster than average cost of funds (COF) exacerbated by CASA ratio falling by 5ppts from a year ago to 31.9%. Slight improvement in Cost to Income ratio (CIR) which was 30bps lower at 54.9% (vs. industry average of 46.3%) as opex (+1.7% YoY) was slower than top-line growth (+2.2% YoY). Financing remained strong at +12.6% YoY but slower than a year ago at +16.8% YoY (vs. industry’s +6.0% YoY and our +8% YoY estimate). As with financing, deposits were healthy at +8.0% YoY (vs. industry’s +3.2% YoY) but Deposits plus Investment Account (IA) surged ahead at +14.6% YoY (vs. our estimate of +9.4% YoY). Despite the strong deposits growth, CASA was weak, declining by 7.5% YoY. As financing outpaced deposits, financing-to-deposit ratio (FDR) rose by 4ppts to 93.5%. As with the industry, asset quality remains resolute with Gross Impaired Financing ratio (GIF) deteriorating slightly by 1bps to 0.95% (but still better than industry’s 1.63%) but credit charge improved by 32bps to 0.09%. Financing Loss Coverage fell by 24ppts to 175.7% but remains the best in the industry. Capital remains adequate with CET1 and CAR at 11.9% and 15.0% well above the regulatory requirements of 7.0% and 10.5%, respectively.

Still selective ahead. Our view on tight loan growth and downside pressure on NFM still holds for 2017. Recall that earlier Management guided for a cautious year as NFM will be facing downward pressure with competition for longer-term deposits (to meet high Net Funding Stability Ratio by 2018 as required by BNM under Basel III). Thus, we believe the strategy for 2017 still holds: (i) selective assets growth, (ii) balancing growth and net income, and (iii) defending NFM. Although Islamic Financing is still in demand, management is adopting a moderate growth target of ~8% for FY17 (with financing slowing down in the last quarters we view that this strategy still holds) in order to defend its NFM margin. We understand that Management expects stable asset quality with credit costs for 2017 under 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.

Forecast. No change in our earnings forecast for FY17 (RM582.7m) as results are in line with our estimates.

No change in TP with a MARKET PERFORM call. Our GGM-TP is maintained at RM4.54. This is based on a 1.8x FY18E P/B where we utilised: (i) COE of 9.2%, (ii) FY18E ROE of 14.5%, and (iii) terminal growth of 2.5%. With a potential total return of ~5%, we maintained BIMB to MARKET PERFORM.

Source: Kenanga Research - 17 May 2017