Kenanga Research & Investment

Bank Islam Malaysia - A More Palatable Call

Publish date: Wed, 31 May 2023, 09:27 AM

1QFY23 net profit of RM118.1m (+12% YoY) was below expectations in lieu of higher operating costs to come. The group is seeing poorer marks with its asset quality but could make up for it with more aggressive overall customer acquisition. While we cut our earnings by 9% and lower our GGM-derived PBV TP to RM2.25 (from RM2.30), we upgrade BIMB to OP (from MP) as the recent selling is overdone, presenting a more attractive entry point to a high-yielding shariah alternative.

1QFY23 below expectations. 1QFY23 net profit of RM118.1m made up 21% of our full-year forecast and 20% of consensus full-year estimate. Cost pressures are likely to mount in the latter periods which could drag earnings further. No dividend was declared as BIMB typically announces a single payment in the year, safe for FY22.

YoY, 1QFY23 total Islamic income grew by 9%, supported by a higher gross financing base (+11%) amidst moderating net interest margins (NIMs) at 2.28% (-6 bps) from intensifying deposits competition. On the flipside, investment income surged 53% mainly thanks to securities disposal gains during the period. Cost-income ratio continued to expand to 63.2% (+2.3 ppts) as expenses broadly increased by 21% in favour of talent retention and IT investments. Credit cost saw a rise to 38 bps (+19 bps) possibly with the re-emergence of troubled retail accounts post graduation from repayment assistance programs from mounting interest rate pressures. That said, the higher income did support 1QFY23 earnings to report at RM118.1m (+12%).

Briefing highlights. The group saw a notable hit to its impairments in the recent quarter but opines other fundamentals will keep operations intact.

1. A loans growth target of 7%-8% is lower than its prior year’s 11% accomplishment but is still higher than industry average. The group reckons that demand is still strong in the retail space and the offering of non-packaged financing could support its relevance.

2. NIMs could be hampered in the immediate term owing to intense competition for deposits but is expected to pick up moderately in the medium-term. While the abovementioned non-packaged financing which is of higher asset yield but higher risk in nature could help, market rates are expected to ease as pre-funding exercises have ceased.

3. The group has been progressively consuming its management overlay with a balance of RM123.6m remaining. Given that the changing macros is showing signs of diminishing its books quality, the group looks to retain most of its overlays for the time being. This may lead to a recalibration of the earlier 25-30 bps credit cost guidance.

4. To meet its LEAP25 initiatives, the group will continue to invest on IT infrastructure and capabilities. It expects overall operating expenses to rise by 8%-9% to fuel its objectives, but reckons its cost-income ratio could narrow to 58% with the increase in topline.

Forecasts. Post results, we cut our FY23F/FY24F earnings by 9% each, mainly to incorporate higher operating spend and investments amidst the group’s digitalisation efforts.

We slightly lower our TP to RM2.25 (from RM2.30) but upgrade to OUTPERFORM (from MARKET PERFORM). Our call is based on an unchanged GGM-derived FY24F PBV of 0.68x (COE: 10.4%, TG: 3%, ROE: 8%), adjusted from the abovementioned earnings revision. The stock saw a heavy selling down as we believe retail investors crowd towards higher capitalisation peers. We opine current price levels presents a more favourable risk-reward for BIMB, given it has continuously sustained stronger-thanindustry financing growth. Meanwhile, its dividend yield of 8% could be attractive to yield-seeking investors. The stock also provides a shariah-alternative against conventional players, hence is more accessible to certain institutions. 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-than-expected margin squeeze, (ii) lower-than-expected financing growth, (iii) worse-thanexpected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 31 May 2023

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