What’s New

• In-line earnings; topline led by resilient financing growth

• Further improvement in asset quality; impaired financing ratio dip below the 1% mark

• Cautious targets for FY17F; financing growth of 8% and relatively similar deposit growth

• Maintain BUY with unchanged TP of RM5.00

Backed by solid fundamentals, BUY. BIMB has an arsenal of tools to lean on to weather the current soft operating environment. The bank has a niche in Islamic banking (which supports financing growth momentum), high CASA ratio and liquid balance sheet (to stave off NIM compression) as well as high financing loss coverage (to buffer against potential deterioration in asset quality). We believe the market is not assigning sufficient premium for a franchise delivering ROEs of c.15% and better-than-industry metrics.

In-line 4Q/FY16 earnings, y-o-y earnings growth led by strong revenues. Despite a slight dip in NIM, net fund-based income growth was healthy, underpinned by strong financing growth (14% y-o-y; led by house financing). Together, deposit and investment accounts grew at 12% y-o-y. Inclusive of investment accounts, financing-to-deposit ratio ended the year at 80%. Non-fund based income continues to be driven by contributions from Syarikat Takaful. Expenses were well contained, keeping its cost-to-income ratio at c.55%. Credit cost declined in 4Q, as impaired financing slid by 6% q-o-q but rose a mere 2% y-o-y. Impaired financing ratio was reduced to less than 1%, while financing loss coverage stayed high at 175%.

Growing cautiously in FY17. BIMB is keeping defences up in 2017, with a financing growth target of 8%. This remains higher than the system’s loan growth, which we expect to reach 5%, at best. Deposit (including investment accounts) is also expected to grow at a similar pace, i.e. 7-8%. BIMB hopes to contain NIM compression at less than 5bps and increase in charge-off by a few bps in the coming year. We adjusted our assumptions accordingly, which resulted in minimal changes in earnings (<2%). The impact of lower financing growth assumption (from 12% to 8%) was negated by lower charge-off rates (from 31/39bps to 25bps each) and impaired financing ratio assumption (from 1.05% to 1.0% across FY17-18F).

Valuation:

Our RM5.00 TP is derived from the Gordon Growth Model (assuming 15% ROE, 4% long-term growth and 10% cost of equity) and implies 1.9x FY17F BV. We believe its current valuation presents a good opportunity to gain an inexpensive entry into a solid Islamic banking franchise.

Key Risks to Our View:

Asset-quality deterioration amid challenging operating environment could result in higher-than-expected provisions.

Source: Alliance Research - 28 Feb 2017