This article first appeared in The Edge Financial Daily on January 29, 2018

BIMB Holdings Bhd
(Jan 26, RM4.10)
Maintain buy with an unchanged target price (TP) of RM4.90: BIMB Holdings Bhd’s (BIMB) share price has underperformed the KLCI and peers over the past 12 months. We believe the overhang could be attributed to news of potential corporate exercises within the group — the latest being a merger of Bank Islam Malaysia (Bank Islam), Bank Muamalat Malaysia (Bank Muamalat) and Bank Simpanan Nasional (BSN). In this report, we performed a financial comparison to see what a merger could possibly imply for BIMB.

Cumulative loan book of the three banks would double Bank Islam’s financing portfolio of RM40 billion as at end-December 2016. With BSN’s strong foothold in personal financing to civil servants, consumer financing would account for 79% of the merged entity’s portfolio versus Bank Islam’s current 73%.

Higher asset yields in BSN and Bank Muamalat of 5.8% and 5.2% respectively, given their higher risk portfolio (Bank Islam: 5%) could lift the merged entity’s net interest margins (NIMs). On funding, Bank Islam would also be able to leverage on BSN’s extensive network to widen its deposit base and double its current and savings account (Casa) deposits to RM27 billion from RM14 billion in December 2016.

BSN’s extensive network of 403 branches (Bank Muamalat: 62, Bank Islam: 145) and its sizeable personnel expenses have led to a high cost-to-income ratio (CIR) of 78% versus Bank Muamalat and Bank Islam’s CIR of about 58% to 60%. Given the duplication of resources, we believe there is room for cost rationalisation that would improve efficiency and lower CIR.

BIMB’s return on equity (ROE) of about 13% are superior to that of BSN and Bank Muamalat’s 3.2% and 7.3% respectively. Our ROE decomposition reveals that, besides the lower CIR, Bank Islam’s ROE can be largely attributed to its ability to sustain asset quality. We believe BIMB’s credit risk management policies would help improve asset quality of the merged entity. BSN and Bank Muamalat’s current non-performing loan (NPL) ratios stand at 2.5% and 2.1%, respectively. This compares with BIMB’s NPL ratio of 0.98%. — RHB Research, Jan 26