This article first appeared in The Edge Malaysia Weekly on June 11, 2018 - June 17, 2018

BIMB Holdings Bhd will likely embark on a group restructuring next year at the earliest as it waits for the dust to settle at Lembaga Tabung Haji (TH) where there is currently a boardroom shake-up, sources say.

TH is its biggest shareholder with a 53.47% stake, followed by the Employees Provident Fund (12.75%)

So far, four of TH’s 10-member board, including chairman Datuk Seri Abdul Azeez Abdul Rahman, have resigned since the change of government after Pakatan Harapan’s historic win in the 14th general election.

The other three are Tan Sri Mohamed Apandi Ali, the country’s former attorney-general; Tan Sri Mohd Irwan Serigar Abdullah, the former Treasury secretary-general; and Datuk Rosni Sohar, a politician.

BIMB, a financial holding company (FHC), has long been mulling a group restructuring that basically involves its wholly owned banking entity, Bank Islam Malaysia Bhd, taking over its listing status on Bursa Malaysia.

Apart from the bank, BIMB owns 59.64% of listed Islamic insurer Syarikat Takaful Malaysia Bhd (STMB) and all of stockbroking firm BIMB Securities Sdn Bhd.

“Yes, BIMB needs to collapse [the FHC] structure. It’s not something that will happen this year but maybe next year. There are changes happening on the [TH] board and new people will come in, so BIMB has to wait for things to settle [before pursuing the restructuring issue],” says a source familiar with the matter.

The source adds that BIMB no longer has plans to sell or trim its stakes in STMB and BIMB Securities as part of the possible restructuring. The group had considered those possibilities about a year ago. At that time, it was open to a strategic shareholder taking a stake in BIMB Securities.

The move to keep its almost 60% stake in STMB makes sense considering that the insurer has been an increasingly strong profit contributor to the group. It accounted for about 31% of the group’s profit before tax and zakat of RM273.6 million in the first quarter of FY2018. STMB is a major provider of non-interest income for the group.

BIMB Securities, however, made a pre-tax loss of about RM200,000 in the first quarter.

“We are of the view that it would be best for [STMB] to be transferred and parked under Bank Islam, given its strong contributions to the group. Without the restructuring, BIMB, as a FHC, will need to meet capital requirements by 2019,” says DBS Group Research in a March 7 report on BIMB. It is understood that capital adequacy rules for banks under Basel III will extend to FHCs in 2019.

In the last two to three years, banking groups such as RHB, Affin and Alliance have collapsed their FHC structure. Others like AMMB Holdings Bhd and CIMB Group Holdings Bhd have maintained their FHC structure.

BIMB’s potential restructuring, and concerns over how it might be done, may have been one of the reasons for the stock’s underperformance in recent times, says an analyst.

But BIMB’s stock is currently among analysts’ top banking picks following its strong financial results for the first quarter of 2018 that were released two weeks ago.

Its 1Q2018 net profit, at RM172.1 million, was above analysts’ expectations, coming in at 26.2% of consensus’ full-year forecast. The profit was higher by 14% year on year and by 15% quarter on quarter.

BIMB’s after-tax return on equity, at 15.2%, was one of the highest among local banking groups.

“We believe BIMB’s valuations are unduly unappreciated, given its robust financial metrics. Where it may fall short is the liquidity of its stock, given the high and tight holdings of its major shareholders. BIMB could prove sceptics wrong if its financing growth is sustained above that of the industry,” says DBS Group Research in a report after the 1Q results.

The 1Q earnings were driven by strong net interest income growth (8.6% year on year) as a result of above-industry financing growth of 6.8%, coupled with a three-basis-point increase in net interest margin from the last overnight policy rate hike. There was also commendable takaful revenue growth of 9.8% and fee income growth of 16%.

Allowance for impairment of financial assets stood at RM21.2 million in 1Q2018 compared with just RM8.8 million a year ago. Analysts are unperturbed by the higher provisions at the group as this is seen as a normalisation following the low base last year when it benefited from lumpy writebacks.

Credit cost, going forward, should stay at around 20 basis points, DBS Group Research says.

Asset quality stayed strong, as reflected by the low gross impaired financing ratio of 0.99%.

About 76% of its gross financing of RM43.14 billion as at March 31 is to the household sector. Home financing and personal financing (PF) accounted for the bulk of its consumer financing, at RM17.29 billion and RM12.77 billion respectively.

Some analysts say its loans to civil servants could be at risk if government agencies were to downsize their staff in the near future. It is understood that at least 50% of its PF is to civil servants. It is much less in the home financing segment.

Nevertheless, the earlier source says that even if it were to happen, it isn’t expected to have a material impact on the group.

“Management has indicated that civil servants PF composition is not affected by the new government’s recent move to not renew the contracts of 17,000 workers — the group’s civil servant loan portfolio consists of permanent staff, where risk of layoff is lower,” says UOB Kay Hian Research in a recent report.

The bank’s PF to civil servants is done via package financing, whereby monthly repayment is made via salary deductions or transfers, which is deemed relatively safe.

Bloomberg data shows that of nine analysts who track the stock, eight have a positive call on it and one a “hold”. Their average 12-month target price is RM4.85, which indicates more upside from its closing price of RM4.05 last Thursday. The stock has shed 7.9% so far this year.

“Despite the strong 1Q2018 results, we maintain our ‘hold’ call on BIMB as we believe that Permodalan Nasional Bhd’s plan to introduce Islamic shares for Malayan Banking Bhd could cause some investors to switch out of BIMB, which is currently the only shariah-compliant listed bank in Malaysia,” says CIMB Research in a May 30 report.
 

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