1HFY22 net earnings of RM223.0m (-37% YoY) missed expectations, mainly due to wider-than-expected operating costs which likely supported the recent financing growth. Investments are likely to stay heavy in preparation of meeting LEAP25 targets, which could drag near term prospects. Downgrade to MP (from OP) with a lower TP of RM2.45 (from RM2.90).

1HFY22 missed. 1HFY22 net profit of RM223.0m is below expectations, making up 43% of our full-year forecast and 34% of consensus full-year estimate. The negative deviation appears to be led by higher-than-expected personnel and overhead expenses. Although impairment allowances increased by 69%, the translated credit cost of 26 bps is within the group’s guidance. No dividend was declared, as the group typically pays a single final dividend.

YoY, 1HFY22 total Islamic income was flat (+1%) in spite of an 8% growth in gross financing as estimated NIMs slid to 2.66% (-36 bps), owing to higher cost of funds as CASA mix eroded (-1.3 ppt). Meanwhile, investment income fell 26% mainly due to investment and forex losses during the period. Operating expenses rose by 9% as higher personnel costs was likely driven by an increase in headcount. In terms of financing provisioning, additional bookings led credit cost to come in at 26 bps (+10 bps) possibly from greater specific allowances. All in, 1HFY22 net PATAMI registered at RM223.0m (-37%).

Finding a middle ground. BIMB looks to deliver its FY22 targets well, making significant progress in its home and personal financing portfolio from community-driven initiatives. This likely came from increased sales efforts which could be the cause of the higher personnel costs reported. The group had also invested into digitalising its infrastructure but this may require further economies of scale to more efficiently manage costs, which the group had aimed to achieve in its LEAP25 strategies. While credit costs appears to be tracking unfavourably on the surface, we believe that this is in line with the group’s expectations where loans staging are more visible and less volatile as per previous periods owing to repayment programs and moratoriums.

Forecast. Post results, we cut our FY22F/FY23F earnings by 8%/2% mainly to incorporate higher operating expenses. We had also lowered our NOII assumptions slightly.

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower TP of RM2.45 (from RM2.90). In addition to our lower earnings, we had also lowered our ROE input in our GGM assumptions from 10% to 9%, reflective of possibly lower medium-term prospects. Our new TP is derived from a PBV of 0.85x (COE: 10.0%, TG: 3.0%, ROE: 9.0%) from 1.0x against a FY23F BVPS of RM2.88. While the stock offers an investment opportunity in a shariah-compliant financier, we believe the risk-reward at current price levels are well matched. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher/lower-than-expected margin, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-expected movement in asset quality, (iv) stronger/weaker capital market activities, (v) favourable/unfavourable currency fluctuations and (vi) changes in OPR.

Source: Kenanga Research - 1 Sept 2022