BIMB’s 6M17 core earnings of RM287m (+3% YoY) is within expectations, accounting for 49%/48% of our/consensus estimates. No dividend declared as expected and forecast earnings unchanged, TP of RM4.54 maintained with a MARKET PERFORM call.

Enhanced by Takaful business but easing ahead. 6M17 core earnings improved by +2.8% YoY to RM86.8m boosted by lower impairment allowances (-13.5% to RM33.8m) as top-line revenue eased to +1.4% YoY to RM1265.4m. At the PBT level, both Islamic Banking and the Takaful Business saw moderate performance with Islamic banking and Takaful Business slowing to +2.3% and +12.7% YoY, respectively. At the Group level, Net Financing Margins (NFMs) compressed by 13bps to 2.2% (vs our expectation of a 6bps compression) as yields fell faster than average cost of funds (COF) exacerbated by CASA ratio falling by 5ppts YoY to 31.9%. Cost to Income ratio (CIR) was higher by 130bps at 56.6% (vs. industry average of 49.1%) as opex (+3.6% YoY) outpaced top-line growth (+1.4% YoY).

Financing remained strong at +11.2% YoY but slower than a year ago at +16.7% YoY (vs. industry’s +5.7% YoY and our +8% YoY estimate). As with financing, deposits were healthy at +9.0% YoY (vs. industry’s +3.0% YoY) but Deposits plus Investment Account (IA) surged ahead at +13.5% YoY (vs. our estimate of +9.4% YoY). Despite the strong deposits growth, CASA was weak, declining by 6.2% YoY. As financing outpaced deposits, financing-to-deposit ratio (FDR) rose by 2ppts to 97.3% but Financing-to-Deposit & IA ratio (FDIAR) was comfortable dropping by 2ppts to 86.7%. As with the industry, asset quality remains resolute with Gross Impaired Financing ratio (GIF) improving slightly by 3bps to 1.02% (but still better than industry’s 1.63%) with credit charge improving by 20bps to 0.17% (vs our expectation of a 0.17%). Financing Loss Coverage fell by 19ppts to 160.0% but remains the best in the industry. Capital remains solid with CET1 and CAR at 13.0% and 16.0% improving by 30bps and 10bps, 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 namely; (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 <7%, we maintain BIMB at MARKET PERFORM.

Source: Kenanga Research - 29 Aug 2017