We are downgrading our recommendation to NEUTRAL (from Buy) with an unchanged GGM-derived TP of MYR4.10 (8% upside). The recent run up in share price means that the potential upside to our TP is now limited. Banks’ earnings tend to be more sensitive to NIM and credit cost assumptions. For BIMB, we are more concerned with NIM pressures.

Investment case. We reduce our call to NEUTRAL (from Buy), as the potential upside to our TP is now limited, due to the run-up in share price. There is no change to our GGM-derived TP of MYR4.10, which assumes: i) COE of 10.5%, ii) ROE of 14.5%, and iii) 4.5% long-term growth. Our TP is based on 2016FP/BV of 1.67x. Risks. Key risks would be net financing margin (NIM) pressure from funding and weaker-than-expected asset quality.

Forecasts. Our 2016F net profit growth appears muted (+1% YoY vs. 2015: +3% YoY) mainly as we modelled in higher credit cost of 33bps (2015: 21bps).Apart from the above, other key assumptions include financing growth of 13% and NIM compression of 6bps. Our 2016F assumptions are generally in line or more conservative relative to management’s guidance, which include low -teens financing growth as well as stable NIM and credit cost. We expect growth momentum to improve in 2017, with bottomline projected to rise by 9% YoY as credit cost eases to 25bps, although this would still be above the 5-year average credit cost of 20bps.

Asset quality a concern, but high LLC offers buffers. Recall that household financing formed 73% of BIMB’s loan book, with personal financing making up 40% of total household financing. While there have been concerns among investors as to potential asset quality issues ahead – especially amid a weaker macroeconomic environment – we are comfortable with our 2016F credit cost assumption, and would not be too surprised if actual credit cost pans out to be milder than expected. We highlight that the gross impaired financing ratio for household and personal financing stood at 0.7% and 0.6%, below the system’s 1.1% and 1.9% respectively. Also, despite running a large personal financing portfolio, we think that BIMB’s high financing loss coverage (LLC) of 175% should help provide some cushion in facing headwinds ahead.

NIM may come under further pressure if liquidity tightens further. On the other hand, we think there could be downside risk to NIMs if the tighter liquidity condition is prolonged or deteriorates further. Prior to the exclusion of financing funded by Islamic investment accounts in the computation of system financingto-deposit ratio (LDR), we note that LDR for Islamic banking was about 600-700bps higher than overall system LDR. We also noticed that funding cost pressures were generally more acute within the Islamic banking space for banks, as compared to conventional banking. Indeed, despite a CASA ratio of 35%, BIMB’s NIM in 2015 fell by an estimated 14bps YoY mainly due to a 21bps rise in funding cost.