KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• Earnings decline due to modification loss, lower PBT from Takaful operations and higher provisions

• Bank Islam net income expanded despite modification loss in 2QFY20

• Strong gross financing growth and robust deposits growth

• Asset quality improved

• No change to earnings estimates

• Maintain BUY with unchanged TP of RM4.25

Within expectations. The Group's 9MFY20 earnings was within ours and consensus' expectations. Its net profit came in at 71.6% and 73.6% of our and consensus' full year estimates respectively.

Earnings declined due to lower income. Net profit for 9MFY20 fell - 17.8%yoy as a result of a decline in total distributable income. This contracted -10.8%yoy contributed by >100%yoy increase in provisions, -12.9%yoy fall in net takaful income and modification loss of RM97.8m in 2QFY20.

Bank Islam PBTZ fell due to modification loss. Bank Islam saw its 9MFY20 PBTZ fell -18.6%yoy to RM526.3m as it was impacted by the modification loss. As for Syarikat Takaful, its PBTZ saw a marginal declined -7.7%yoy to RM310.0m as operating revenue was lower by - 6.9%yoy to RM2.18b, mainly attributable to lower sales generated from the Family Takaful business.

Bank Islam net income expanded. Bank Islam’s net income in 9MFY20 grew +2.7%yoy to RM1.58b despite the modification loss. This was due to strong gross financing growth. Meanwhile, profit to depositors & investment account holders fell -15.6%yoy to RM980.1m. NIM compressed -15bp yoy to 2.39%. Its NIM was impacted by the multiple OPR cuts seen this year.

Robust gross financing growth. Gross financing expanded +12.0%yoy to RM53.8b. Consumer segment grew +10.8%yoy to RM40.5b. Main drivers were house financing growth of +9.3%yoy to RM21.6b and personal financing growth of +15.0%yoy to RM16.6b. Meanwhile, corporate financing grew +26.0%yoy to RM7.1b.

Asset quality improved. The gross impaired financing (GIF) ratio improved by -51bp yoy to 0.60% as at 3QFY20. This could be the result of the high growth in gross financing as compared to GIF given the loan moratorium period and steady profile of its borrowers such as government employees.

Good deposits growth. Total deposits and investments accounts (IA) as at 3QFY20 grew at a lower rate of +5.2%yoy to RM59.0b (vs. +6.8%yoy to RM58.5b as at 2QFY20). However, this was due to decline in non-CASA accounts which fell -4.0%yoy to RM40.0b. The deposits growth and IA growth were driven by +59.4%yoy increase to RM12.7b in IA and growth in CASA of +20.3%yoy to RM17.3b.

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 expansion and deposits growth which will relieve pressure to NIM. As we had expected, Bank Islam’s credit cost increased and we are concern that asset quality will come 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 - 1 Dec 2020