9MFY20 results came in line with a pleasant dividend surprise. While significant uptick in credit charge was a surprise due to additional overlays, we believe the coming quarter will see a normalised charge. On a positive note, GIL improving to 0.6% and the dividend suggest management is comfortable with its current capital ratios with unlikely major deterioration in asset quality ahead. OUTPERFORM reiterated with a higher TP of RM4.95

In line. 9MFY20 CNP of RM498m came in at 70%/72% of both our/consensus estimates. A DPS of 12.6 sen was declared (vs FY19: 16 sen), a surprise (given the capital preservation mantra currently) implying the same payout ratio as in FY19 at 36%.

Results’ highlights. 3QFY20 CNP fell 11% QoQ to RM136m despite 9% growth QoQ in top-line- dragged by higher opex and impairment allowances (RM155m vs 2QFY20: RM26m). 9MFY20 top-line was commendable at +4% YoY underpinned by fund-based income (+13% YoY). The 3QFY20 strong financing was a surprise (+12% YoY,+4% QoQ vs guidance of ~+7% YoY), suggesting BIMB is strategically front loading its financing (especially from higher yielding assets - PF grew 15% YoY, 7% QoQ) to compensate for its NFM erosion. NFM eroded by 18bps (excluding Modification loss) YoY but saw a 45bps increase QoQ due to absence of Modification loss in 3Q. Impairment allowances grew >+100% (or 54bps vs 30-40bps guidance) with the bulk coming in 3Q (119bps or RM107m) attributed to management overlay. No Day 1 loss recorded in 3Q (2Q: RM98m) but we do not discount additional Modification loss in 4Q as we understand application for the extended moratorium are trickling in currently. On a positive note, asset quality continued to be resilient with GIL down by 50bps/10bps YoY/QoQ to 0.60%. Capital ratios continued to be healthy at 18% and 13%, respectively, with Financing Loss Coverage surging to 279% from 205%) in 2Q.

Moving forward, we do not expect significant credit charge in the coming quarter given that much of the overlays have been done in 3Q, hence likely to see a much normalised credit charge of 12-20bps for the quarter bringing FY20E credit charge to c.40-45bps. We do not expect significant Modification losses and if any will be negated by incoming reversals (YTD: RM6m), thus we keep our Modification losses assumption of c.RM110m. Loan growth assumption is unchanged for FY20E at 7-8%.

Post-results, we tweak our FY21E/FY22E earnings by -5%/1% based on the above assumptions.

Call maintained. Our TP is revised slightly to RM4.95 (from RM4.80) based on SoP valuation; FY21E PBV of 1.2x on Bank Islam and market value of 0.25 shares of Syarikat Takaful Malaysia (RM/share @TP of RM5.25/share (from RM5.00/share previously). The 1.2x PBV is higher compared to most conventional banks, but justified given its scarcity value as the only listed shariah-compliant Bank currently coupled with a robust asset quality among its peers. Undemanding valuation coupled with an enticing entry into Syarikat Takaful Malaysia given its restructuring plan that is expected to be completed by 1H21, we reiterate our OUTPERFORM rating.

Risks to our call are: (i) further MCOs, (ii) lower-than-expected loans and deposits growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 1 Dec 2020