We come back from a recent management meeting with BIMB feeling much more sanguine on its earnings prospects. With the prospect of higher financing growth, better NFM, manageable credit costs and strong ROEs, we raised our TP to RM4.90 and reiterate our OUTPERFROM call.

Better loans for FY18. FY17 loans are expected to be slower than targeted. To recap, BIMB, targeted for a 8% loans growth for FY17E (FY12-16, 5-year average growth; 23%) but management guided for a lower estimation of ~7%, attributed to sluggish corporate loans. However, FY18 loans growth is e expected to be at double-digit (or at ~10% on the conservative side) and as with FY17, loans will still focus on secured and less risky assets.

VBI, the business model focusing on the real economy. The Value Based Intermediary (VBI) model, which was announced on 18 Sep 2017, will be its core business model moving forward. Asset acquisitions will focus on assets with positive impact to the economy, society and environment. The sectors in focus will be SME’s, manufacturing, power plant and infrastructure with BIMB targeting a portfolio of 75% retail and 25% corporate/commercial.

Restructuring portfolio to defend NFM. Confident of its asset quality and good track record in assets, BIMB is expected to raise its personal financing (PF) contribution from 30% to 50% with mortgage financing reduced to 50% from 70% as PF have better financing rate; thus, defending its NFM (net financing margin) better. NFM will be further supported with the focus on more trade financing (in line with its VBI) as it has greater stability despite lower margins.

Asset risk benign. Management painted a strong asset quality for FY18 (9M17: GIL at 1.07%) with manageable risks in asset quality despite raising its PF contribution to 50%. As 2018 is an election year coupled with improving economic fundamentals, wages and employment are expected to stabilize, reducing the risk coming from this segment. Salary deduction model remains the core of its PF contributing 90% with the remainder coming from program lending. With its historical credit scores healthy and impairments from PF among the industry lowest, BIMB has low credit risk concerns prompting a higher appetite for PF. With loan loss provisioning at 148% we view the MFRS9 impact will be benign with credit costs manageable.

NFM a concern but alleviated due to OPR hike. With BIMB’s Net Stability Funding Ratio (NSFR) regulatory ratio at <100%, we expect funding costs pressure ahead in 2018 eroding its NFM but the recent OPR hike is expected to alleviate NFM concerns with management expecting NFM improvement of 4-5bps in 2018.

Forecast. Our FY17E/FY18E forecast is raised by 3%/7% to RM600m/RM693m on account of improved earnings contribution from Takaful (+9% YoY) for FY17. FY18 will be supported by higher loans (8% to 10%), better NFMs (5bps expansion vs 2bps compression) and higher earnings from Takaful (+16.0% YoY) on account of decent gross earnings contribution of 10% and stable claims incurred ratio of 52%.

TP revised with an OUTPERFROM call. Our TP is raised to RM4.90 (from GGM-TP of RM4.54) based on a blended FY18E PB/PE of 1.6x/12.3x. We used a blended PB/PE ratio to reflect a better ROE/loans growth. The 12.3x PE is at 5-year mean to its loans growth whilst the 1.6x (0.5SD below mean) is to reflect the risks of its higher composition of PF. With a strong double-digit ROE second only to PBBANK we reiterate our OUTPERFORM call.

Source: Kenanga Research - 8 Feb 2018