BIMB’s 1QFY20 came broadly in line, underpinned by strong financing and Takaful contributions despite margins coming under severe pressure. We revised down our FY20E earnings to account for higher modification losses ahead putting further pressure on Net Financing Margins. TP is revised to RM4.75 based on SoP valuation. With undemanding valuation coupled with an enticing entry to Syarikat Takaful Malaysia (STM) given its restructuring plans expected by end of 2020, OP rating is maintained.

In line. 3MFY20 CNP of RM209m was up by +3%/+16% YoY/QoQ accounting for 24%/28% of our/consensus estimate.

Strong financing. 3MFY20 CNP was underpinned by a resilient top line (+5% YoY/+6% QoQ) as net income from depositors’ funds investments grew +7% YoY/+4% QoQ with Takaful income continuing to be the earnings driver at +3% YoY/+10% QoQ contributing to 35% of top-line. The resilient income from depositors’ fund was driven by strong financing growth of >+9% as Net Financing Margin (NFM) saw pressure with a compression of 21bps YoY/13bps QoQ given the spate of OPR cuts since May last year. On a positive note, CASA saw a 5ppt uptick YoY/3ppt QoQ to 36% mitigating the downward pressure on NFM. However, PBT of RM322m (+1% YOY) was dragged by higher Opex (+7%) translating to a slight 1ppt uptick of CIR to 52%. QoQ, PBT saw a +21% improvement on account of declining opex (-9%) mitigated by spike in credit charge (+22bps). Credit charge saw a 5bps YoY uptick to 0.25% (vs guidance of 0.20%). GIL saw improvements (declining 12bps YoY/and 3bps QoQ) to 0.83%. CET 1 saw 80bps YoY improvement to 12.6% with ROE ending 14.1% (within our estimation).

Expecting a lower spike in credit charge. Based on its pipeline, BIMB expects FY20 loans growth to be in the range of 5-7%. We expect further downward pressure on NFMs given the additional 50bps OPR cut in May plus higher-than-expected modification loss (guided at 10% of FY19 PBT). While its peers have been guiding for >2x spike in credit charge from their normalised run rate, BIMB guided for a lower spike given that its loans are mostly mortgages where historically the credit charge has been largely low. Furthermore, its Personal Finance customers (PF) are mainly civil servants and GLC staff with collections via salary deduction and we do not expect massive retrenchment ahead from these segments.

Our FY20E earnings are revised down by 9% to RM786m based on these revised assumptions; (i) NFM at -25bps (from -10bps), (ii) financing at +5% (unchanged), (iii) CIR at 52% (from 58%), and (iv) credit charge at 30bps (from 17bps) with Takaful income flat (vs +18% previously) translating to ROE of 13% (from 14% previously).

TP revised. Our TP for BIMB now is RM4.75 (from RM4.05 previously) based on SoP valuation; FY20E PBV of 1.2x to Bank Islam (Unchanged) and Market Value of 0.25 shares of STM (RM/share @TP of RM4.85/share vs. current share price of RM4.38 previously). While 1.2x PBV is higher versus most mid-sized conventional banks, we feel this justified for: (i) the scarcity value as the only listed shariah compliant Bank currently, and (ii) the existing structure of BIMB implying a 1.0x book value to Bank Islam which could be higher after the holding company discount is removed post distribution. With undemanding valuation coupled with an enticing entry to Syarikat Takaful Malaysia (STM) given its restructuring plans expected by end of 2020, we reiterate OUTPERFORM.

Downside risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 29 May 2020