INVESTMENT HIGHLIGHTS

• Upper bound of our expectation

• PBTZ growth remained robust for Bank Islam and Syarikat Takaful

• NIM compression moderated by solid gross financing growth robust

• Uptick in GIF ratio but manageable

• Maintain earnings forecast

• We maintain our BUY with unchanged TP of RM5.05

Upper bound of expectation. The Group's 1HFY19 earnings came in at the upper bound of our expectation. Its PAZTAMI of RM397.7m was 55.6% and 52.2% of our and consensus' full year estimates respectively. Earnings grew +23.5%yoy, driven by +16.2%yoy growth in total net income.

Strong showing from Bank Islam and Syarikat Takaful. Bank Islam PBZT for 1HFY19 increased +9.2%yoy to RM437.4m underpinned by net income growth of +10.4%yoy to RM1.02b and contained operating overheads which grew +4.6%yoy to RM485.9m. Meanwhile, Syarikat Takaful posted strong growth of +43.7%yoy to RM212.8m. This was due to higher net Wakalah fee income arising from business growth in the Family Takaful.

NIM compression due to higher cost of fund. Net income margin (NIM) in 2QFY19 for Bank Islam fell -9bp yoy to 2.56% attributable to higher cost of fund (COF). Comparing to the same period last year, COF have increased +14bp to 2.79%. This was due to banks scrambling for deposits last year to meet Net Stable Funding Ratio requirement which drove deposits competition. However, the higher COF was moderated by better asset yield (+5bp yoy to 5.35%) as it revised its base rate earlier this year. Nevertheless, we expect NIM will likely compress further due to the OPR cut in May'19. Based on previous OPR cut in July'16, it took 2 quarters to observe its impact.

Robust gross financing growth will moderate NIM compression. Gross financing grew +7.2%yoy to RM47.0b. Main contributor was the expansion in the consumer, commercial and corporate segments of +7.2%yoy to RM36.0b, +6.8%yoy to RM6.6b and +7.7%yoy to RM4.4b respectively. Overall, house financing continue to be the driver gross financing growth, rising +9.7%yoy to RM19.5b. we believe that a robust gross financing growth will be key to moderating NIM compression. For FY19, the management is targeting a growth of 6-7%.

Deposits grew at slower pace. Total deposits and investment accounts (IA) expanded +10.0%yoy to RM49.8b. This was contributed by longer term deposits as CASA and transactional IA grew +1.1%yoy. Meanwhile, non-CASA and non-transactional IA rose +24.7%yoy to RM37.5b. This is an area of concern as it had put pressure to NIM but we opine that it has been manageable thus far.

R&R accounts lead to uptick in GIF. Gross Impaired Financing ratio (GIF) as at 2QFY19 was higher at 1.19% from 0.97% as at 2QFY18. The uptick was due to accounts in the corporate and commercial segment being rescheduled and restructured (R&R). However, it is fully secured which did not lead to higher provisions. We understand that these accounts are still performing and we expect that it will return to performing later. As for the consumer segment, asset quality improved from 0.70% as at 2QFY18 to 0.67% as at this quarter. Hence, we have no concern over asset quality for now.

Impact on earnings. We are maintaining our FY19 and FY20 earnings forecast.

Earnings potential remains intact. We like the fact that the Group continue to exhibit a strong earnings growth momentum. While there was some deterioration in asset quality, this was due to R&R accounts. Besides, the consumer segment which remains its mainstay continues to have solid asset quality. We believe that the Group should present an attractive investment case. In addition, Takaful Malaysia seems to be able to maintain its position as the leading Shariah compliant insurance provider.

Recommendation. We are maintaining our BUY call for the stock with an unchanged TP of RM5.05. Our TP is based on PBV of 1.5x pegged against its FY20 BVPS.

Source: MIDF Research - 29 Aug 2019