BIMB’s  core  FY13  profit  of  MYR303m  was  in  line,  supported  by:  i) recoveries,  ii)  a  positive  reversal  in  CASA  ratio,  iii)  above-industry financing growth of  22%, and iv) 40% non-financing income ratio. While regulatory  changes  on  Islamic  contracts  remain  a  key  near-term  risk, we believe its fundamentals have improved. Maintain BUY, with its FV at MYR4.90, as its share price has retraced and it trades at 1.5x P/BV.

• In  line  despite  softer  household  debt  market.  BIMB’s  core  profit  of MYR303m,  excluding  a  one-off  MYR48m  tax  expense,  was  within expectations  -  at  102%  of  our  and  98%  of  consensus  estimates.  Its performance  was  supported  by:  i)  recoveries/write-offs,  ii)  a  positive reversal in current, savings  account  (CASA) composition  to  39%  (vs  a low  of  35%  in  Sept 2013),  iii)  above-industry  financing  growth  of  22%, and iv)  a  40% non-financing  and takaful income ratio.  Profits, however were  capped by:  i)  a  lower net financing margin (NIM)  as it faced yield pressure  (floating-rate  financing  ratio  is  now  at  61%),  and  ii)  a persistently  high  cost-to-income  ratio  (CIR)  as  the  bank  expand ed  its branch network.
• Higher  provisioning  buffers  and  capital  adequacy.  Provisioning  for financing (LLC) rose to 176%  (FY12: 142%)  as we saw  more write-offs and  recoveries  in  4Q13.  Segment-wise,  new  corporate  non-performing loans  (NPL)  worth  MYR80m  (MYR30m  from  transport/communication industries,  MYR50m  from  finance  and  insurance)  were  offset  by  NPL improvement  in  household  financing  and  from  the  construction  sector . Bank Islam recorded a Tier-1 capital of 13%.
• Fundamentals intact. We retain our forecasts and  assumptions of  17% financing  growth  (below  management’s  target  of  20%  growth)  and  the net interest margin (NIM) contracting to 2.7%, as it accounts for potential hiccups  from  possible  regulatory  changes  on  Islamic  contracts.  We believe  BIMB’s status as an  Islamic  banking pioneer  and the absence of integration (M&A) risks will  help the bank weather  regulatory risks.  It is able to leverage on its low 66% financing-to-deposit ratio.
• Reiterate  BUY,  SOP-based FV  at  MYR4.90  implying  a  FY14F  P/E  of 17x  (sector  average:  12x)  and  diluted  P/BV  of  2x.  BIMB  is  registering higher  provisioning  buffers  and  asset  quality  (gross  non-performing financing  (NPL)  ratio  improved  to  1.2%  (FY12:  1.5%),  which  indicates stronger fundamentals. We think the  current  price  (at 1.5x diluted P/BV) provides a good buying opportunity for long-term investors.

Financial Exhibits

• We project conservative assumptions with compressed net financing margins, high costto-income and higher loan loss coverage
• The bank’s asset quality is expected to remain resilient due to its high exposure to a safe retail portfolio and prudent underwriting policies
• We are projecting 18.5% growth in financing for the next three years, which is more conservative than management’s 20-25% growth target
• EPS growth is expected to lag behind preprovisioning operating profit growth due to more conservative credit cost assumptions
• SOP valuation

SWOT Analysis

Company Profile
BIMB Holdings provides all aspects of Islamic banking services.  Through its subsidiaries, the company underwrites family and general takaful  (Islamic  insurance)  and  provides  stockbroking  and  other  related  services.  It  also  has  operations  in  unit  trust  management, provides training and consultancy services, and leases fixed assets to related companies.

Recommendation Chart

Source: RHB