KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• Earnings decline due to modification loss

• Otherwise revenue was stable

• Strong gross financing growth and robust deposits growth

• Stable financing book

• No change to earnings estimates

• Maintain BUY with unchanged TP of RM4.25 (from RM4.05)

Within expectations. The Group's 1HFY20 earnings was within ours and consensus' expectations. Its net profit came in at 52.1% and 53.6% of our and consensus' full year estimates respectively.

Earnings declined due to lower income. Net profit for 1HFY20 fell - 8.9%yoy as a result of a decline in total distributable income. This contracted -10.0%yoy contributed by -19.3%yoy fall in net takaful income. There was also a modification loss of RM97.8m in 2QFY20.

Bank Islam PBTZ fell due to modification loss. Bank Islam saw its 1HFY20 PBTZ fell -11.1%yoy to RM389.0 as it was impacted by the modification loss. As for Syarikat Takaful, its PBTZ saw a marginal decline of -0.3%yoy to RM212.1m.

Otherwise Bank Islam’s revenue remained stable. Bank Islam’s revenue excluding the modification loss fell only marginally by -0.3%yoy to RM1.79b despite the tough operating environment. This was due to robust gross financing moderating the NIM (excluding modification loss) compression of -16bp yoy to 2.40%. Its NIM was impacted by the multiple OPR cuts seen this year. Including the modification loss, 1HFY20 NIM came in at 2.10% which we opine was still decent.

Robust gross financing growth. Gross financing expanded +12.1%yoy to RM52b. Main driver was house financing growth of +7.6%yoy to RM21.0b and personal financing growth of +10.2%yoy to RM15.5b. Meanwhile, corporate financing grew +67.8%yoy to RM7.4b.

Stable financing book and proactive management of asset quality. We understand that Bank Islam have engaged or contacted 97% of its retail customer and 100% of its SME and non-SME borrowers in preparation for the end of the loan moratorium. Of these, customer that requires rescheduling and restructuring of its financing is 0.05%, 7.7% and 9.3% for retail, SME and non-SME respectively. We believe that this highlights the stability of its financing book.

Asset quality improved. The gross impaired financing (GIF) ratio improved by -49bp yoy to 0.70% as at 2QFY20. This could be the result of the high growth in gross financing as compared to GIF and steady profile of its borrowers such as government employees.

Good deposits growth. Total deposits and investments accounts (IA) as at 2QFY20 grew +6.8%yoy to RM58.5b which was supported by the +49.8%yoy to RM11.3b increased in IA. Furthermore, we were pleased to see CASA and transactional IA saw strong growth of +22.8%yoy to RM21.2b.

No change to earnings estimates. We are maintaining our earnings estimates given that the results were within expectations.

Valuation and recommendation. We were pleased that the Group continues to exhibit robust performance despite a challenging environment. Of particular note was the pace of the gross financing growth. While the Group had to book in a modification loss, this was within our expectations. We are concern about the possibility Bank Islam’s credit cost increasing and asset quality coming under pressure post loan moratorium. However, we believe that due to the profile of its borrowers, coupled with the management proactive management of potentially troubled accounts, we opine that it will be manageable. Given the stability of its financing book and robust performance, we maintain our BUY call with unchanged

TP to RM4.25. Our TP is based on PBV of 1.1x pegged to its FY21 BVPS.

Source: MIDF Research - 28 Aug 2020