KEY INVESTMENT HIGHLIGHTS

• Results was above expectations as we had underestimated the income from investment account funds

• Earnings was boosted by Syarikat Takaful

• Income from Bank Islam remained resilient

• Gross financing and deposits growth remained strong

• Revising FY19 and FY20 earnings forecast upwards

• Maintain BUY with unchanged TP of RM5.05

Above expectations. The Group's 9MFY19 earnings came in above ours and upper bound of consensus' expectations. Its net profit was 84.7% and 79.6% of our and consensus' full year estimates respectively. The variance was due to our underestimation of the income from investment account funds.

Boosted by Syarikat Takaful. The Group saw its 9MFY19 net profit growing by +16.4%yoy. The strong earnings growth was boosted by Syarikat Takaful (STMB) with Bank Islam playing a supporting role. STMB's PBZT rocketed +41.9%yoy to RM335.7m due to higher net wakalah fee income arising from the growth in the Family Takaful and higher net investment income. Investment income for the Family Takaful increased +10.9%yoy to RM207.2m, while for the General Takaful grew +11.4%yoy to RM23.5m. Both were due to higher profit from Islamic debt securities. Meanwhile, the PBZT at Bank Islam expanded +3.3%yoy to RM646.2m.

Bank Islam's income remained resilient. Net income in 9MFY19 at Bank Islam expanded +7.5%yoy to RM1.54b despite NIM compression. Strong gross financing growth contributed to the rise in income. NIM fell -3bp qoq and -12bp yoy to 2.53% as asset yields fell more than liabilities rate (-4bp qoq vs. -1bp qoq respectively). This suggests that deposits have not been fully repriced yet following the May'19 OPR cut.

Gross financing remained strong. Gross financing as at 3QFY19 grew +8.7%yoy to RM49.0b. Main driver was the continued growth in consumer segment where it expanded +6.8%yoy to RM36.6b. Of these, house financing was the main contributor with +9.0%yoy growth to RM19.8b, followed by personal financing with +6.9%yoy expansion to RM14.4b. Unsurprisingly, commercial segment grew +2.7%yoy to RM6.5b. Corporate loans increased +33.8%yoy to RM5.7b but this was due to a low base.

Uptick in GIL ratio. Bank Islam's GIL ratio as at 3QFY19 went up +19bp to 1.11% from as at 4QFY18. This was mostly due to the commercial and corporate segment as GIL ratio in that segment was up by +46bp to 2.39%. This could suggest stress in asset quality for that segment. However, we should note that this segment represents 25% of gross financing book. There was also an uptick of +8bp to 0.67% in consumer segment GIL ratio, but we opine that this was still manageable.

Sturdy deposits growth from investment accounts. Total customer deposits including investment accounts grew +11.3%yoy to RM56.0b lead by +69.9%yoy expansion in investment accounts (IA) balance to RM8.0b. CASA and transactional IA balance grew +7.7%yoy to RM17.5b. Meanwhile, non CASA expanded +13.0%yoy to RM38.5b which could be the reason for the NIM compression.

Revising FY19 and FY20 forecast upwards. We revising our FY19 and FY20 earnings forecast upwards by +10.6% and +14.7% to take into account the higher than expected income derived from IA fund.

Valuation and recommendation. The Group continues to exhibit a strong earnings growth momentum with robust contribution from Bank Islam and especially STMB. We believe that the Group's profitability indicators are likely to remain intact despite the challenging economic environment. Our slight concern will be on asset quality. However, a majority of its gross financing book comes from the consumer segment and for the moment this segment's asset quality seems manageable. We believe that the Group should still present an attractive investment case. In addition, STMB seems to be able to maintain its position as the leading Shariah compliant insurance provider. Therefore, we maintain our BUY call with unchanged TP of RM5.05. Our TP is based on PBV of 1.5x pegged against its FY20 BVPS.

Source: MIDF Research - 2 Dec 2019