We retain our NEUTRAL call with a revised GGM-based TP of MYR4.55(10% upside). Looking forward, we see income growth, tighter liquidity and asset quality as key challenges banks are facing but BIMB’s liquid balance sheet and high LLC levels should provide a downside cushion.BIMB’s plans with respect to IA could offer interesting funding opportunities and alternatives ahead.

2015 targets. For 2015, BIMB targets, among others: i) financing growth of 14-15%, ii) deposits and investment account growth of around 5%, and iii) a gross impaired financing ratio of <1.5%. While 1H15 financing growth was 11% (annualised), management expects to see financing growth pick up in 2H15, thanks to a healthy corporate financing pipeline.

Not overly concerned over rise in non-performing financing. 2Q15 absolute non-performing financing rose 2% QoQ (+22% YoY) with the rise largely due to the household segment. That said, management was not overly concerned with the rise, citing the strong loan growth and gross impaired financing ratio for this segment was still low at 0.8% (vssystem gross impaired loan ratio of 1.1% for the household segment). Management shared that the gross impaired financing ratio for personal financing was 0.6% while the ratio for mortgages was <1%.

More on IA plans. Management appeared optimistic with respect to the potential opportunities ahead that investment accounts (IA) could offer in terms of funding. BIMB cited the following benefits in growing funding via IA vs deposits: i) manage capital more effectively. Risk-weighted assets funded by investment accounts are excluded from the computati on of capital adequacy ratios; ii) reduce regulatory cost. IA will not be subjected to the statutory reserve requirement; and iii) cost savings as IA will not be subjected to PIDM premiums. With the “cost” savings, management estimates BIMB would be able to offer unrestricted investment account (URIA) depositors an extra 20bps compared to normal deposits.

Forecasts and investment case. We make no change to our earnings forecasts. However, we revised up our TP to MYR4.55 from MYR4.30 after rolling forward valuations to 2016. Our GGM-derived TP assumes: i) a COE of 10.5%, ii) 16.8% ROE, and iii) 4.5% long-term growth. Maintain NEUTRAL.

Analyst Briefing Highlights We set out below the key highlights from BIMB’s analyst briefing yesterday, which was pertaining its 2Q15 results released last month. 2015 targets. For 2015, BIMB targets, among others: i) financing growth of 14-15%, ii) deposits and investment account growth of around 5%, iii) a gross impaired financing ratio of <1.5%. Although 1H15 financing growth was 11% (annualised), management expects to see financing growth pick up in 2H15 thanks to a healthy corporate financing pipeline. As for deposits, 1H15 deposit growth matched financing growth and thus, the balance sheet remained liquid with the financing-to-deposit ratio (FDR) at 72%. Nevertheless, BIMB was willing to allow the FDR to rise to 80% in a bid to manage its financing margin (NIM).

Not overly concerned over rise in non-performing financing. Recall that 2Q15 absolute non-performing financing rose 2% QoQ (+22% YoY), with the rise largely due to the household segment. That said, management was not overly concerned with the rise, citing the strong loan growth and gross impaired financing ratio for this segment was still low at 0.8% (vs system gross ipaired loan ratio of 1.1% for the household segment). Management shared the gross impaired financing ratio for personal financing was 0.6% while the ratio for mortgages was <1%. Its financing loss coverage ratio of 167% is also the highest among the banks under our coverage.2016 strategic priorities. The four strategic priorities set out for 2016 are: i) robust liability management. Given that asset yields are unlikely to move up significantly, the key focus in managing NIMs would be on the liability side, ie manging depot cost. BIMB will continue to focus on growing low cost deposits; ii) capital preservation; iii) safeguarding asset quality. Generally, management thinks the industry could see some deterioration in asset quality ahead. BIMB will continue to closely monitor asset quality as well as manage collections to ensure asset quality stays intact; and iv) earnings stability. This includes keeping a tight rein on costs.

More on IA plans. Recall that under the Islamic Financial Services Act, there are several distinctions between Islamic deposit accounts and investment accounts (IA). BIMB shared more details with respect to the types of IA (ie unrestricted investment account or URIA and restricted investment account or RIA) that it plans to introduce ahead, and its benefits. Some key differences between URIA and RIA are URIA allows the bank to make the ultimate investment decision without restrictions and URIA will be on-balance sheet. BIMB cited the following benefits in growing funding via IA vs deposits, i) manage capital more effectively. Risk-weighted assets funded by investment accounts are excluded from the computation of capital adequacy ratios; ii) reduce regulatory cost. IA will not be subjected to statutory reserve requirement; and iii) cost savings as IA will not be subjected to Malaysia Deposit Insurance Corporation (PIDM premiums). With the “cost” savings, management estimates BIMB would be able to offer URIA depositors an extra 20bps as compared to normal deposits.

Risks The risks include: i) slower-than-expected financing growth, ii) weaker-than-expected NIMs, iii) deterioration in asset quality, and iv) changes in market conditions that may adversely affect the group’s investment portfolio.

Forecasts We make no change to our earnings forecasts.

Valuation and recommendation We lift our GGM-derived TP to MYR4.55 from MYR4.30, after rolling forward valuations to 2016. Our other GGM assumptions include: i) a COE of 10.5%, ii) 16.8% ROE, and iii) 4.5% long-term growth. Our TP is based on a fair 2016F P/BV of 2.04x, which is at premium to the 10-year average P/BV of 1.4x. We believe the premium is fair, given our FY16-18 ROE projections of c.17%, compared with the 6-year average ROE of 12.7%.

Looking forward, we see income growth, tighter liquidity and asset quality as key challenges banks are facing but BIMB’s liquid balance sheet (financing-to-deposit ratio of 72% as at end-2Q15) and high LLC levels (2Q15: 167%) should provide a downside cushion. Overall, we are keeping our NEUTRAL call unchanged.

Source: RHB Research - 9 Oct 2015