This article first appeared in The Edge Malaysia Weekly, on February 15 - 21, 2016.

BIMB Holdings Bhd’s share price has taken a beating recently because of the controversy surrounding its controlling shareholder Lembaga Tabung Haji’s (LTH) reserve funds. Are the concerns overblown?

The share price fell for two weeks straight from Jan 18, shedding 16.3% to sink to a three-year low of RM3.24 on Feb 2 and 3. MIDF Research, in a report a day later, upgraded the stock to a “trading buy” from “neutral” as it felt the sell-off was overdone and not reflective of the group’s fundamental value. However, it maintains its target price for the stock at RM4.22.

“The furore surrounding LTH’s negative fund reserves has, in our opinion, raised unfounded concerns that some of its assets may be liquidated soon in order to be able to pay dividends to its depositors,” MIDF Research says. “With its share price trailing underlying fundamental value, we advocate investors to take advantage of this knee-jerk price action.”

After hitting its low point, BIMB’s stock then went on to recoup some of the losses of the previous two weeks, gaining 8% to reach RM3.50 on Feb 5, before continuing its steep downward spiral. It closed at RM3.43 last Friday.

LTH holds a 53.94% stake in BIMB, which wholly owns Bank Islam Malaysia Bhd, and has a 60.3% stake in listed Islamic insurer Syarikat Takaful Malaysia Bhd (STMB). Unlike BIMB, STMB has not seen any major deviation in its share price trend over the last few weeks.

BIMB’s other substantial shareholders are the Employees Provident Fund (12.65%), Kumpulan Wang Persaraan (5.92%), Permodalan Nasional Bhd (5.84%) and Skim Amanah Saham Bumiputera (5.21%).

BIMB’s latest annual report suggests that LTH has demand and investment deposits within the group to the tune of RM2.639 billion as at FY2014. “There are rumours that some of this could be pulled out, which could lead to liquidity issues for Bank Islam ... but I don’t really think these concerns are valid,” an analyst tells The Edge.

Late last month, LTH was drawn into controversy after it was revealed that it had received a letter from Bank Negara Malaysia warning that its reserves were slipping into negative territory, as it had 98 sen in assets for each ringgit in liabilities and, as such, may not be able to pay dividends to its nine million depositors.

LTH acknowledged receiving the letter, but said that if its investment portfolios were taken into account, its assets outweighed its liabilities.

In a statement last Wednesday, it rejected claims that it resorted to “creative accounting” in preparing its financial statements, saying they were drawn up according to standards set by the Malaysian Accounting Standards Board.

The fund said it was still in the black after paying out dividends and bonuses for 2015, and did not dip into its reserves for the payout as suggested by certain quarters.

Still, while BIMB’s stock may be trading at attractive levels now, not all analysts are rushing to recommend a “buy” on it. Most have maintained their “neutral” calls. While it may well be true that the LTH reserves issue won’t have a direct impact on BIMB, the fact is that the more challenging economic outlook for this year will keep BIMB on its toes.

Maybank Investment Bank (MIB) Research downgraded its call on BIMB to “hold” from “buy” on Feb 1 and cut its target price by 70 sen to RM3.80. Kenanga Research, too, downgraded the stock to “underperform” from “market perform” on Jan 22.

“As consumer sentiment continues to weaken, we are taking a more conservative view towards Bank Islam’s personal financing portfolio and have factored in higher credit costs. We lower our FY2016 and FY2017 earnings forecasts for BIMB by 6% and 7% respectively and ... downgrade the stock,” MIB Research’s banking analyst Desmond Ch’ng says in the report.

Bank Islam accounts for the bulk of BIMB’s earnings. The personal financing (PF) business currently accounts for about 31% of Bank Islam’s total financing portfolio. MIB Research notes that as at end-June 2015, some 90% of its PF took the form of package financing — the loans are serviced through direct salary deductions — and of this, half were to civil servants, 21% to employees of government-linked companies and the rest to private sector employees.

On a positive note, the bank’s exposure to the troubled oil and gas (O&G) sector is low. Financing of private sector employees in the O&G segment accounted for 4.8% (some RM420 million) of total package financing or only about 1.3% of Bank Islam’s total financing portfolio.

So far, the bank’s gross non-performing financing (NPF) ratio is well in check. It stood at a benign 1.14% as at end-September 2015, about the same level as at the start of that year, while financing loss coverage was a respectable 172%. The gross NPF for PF alone has been “impeccable” at less than 1%, MIB Research notes.

“Nevertheless, with consumer sentiment on the wane and living costs on the rise, we are taking a more conservative view of credit costs and have raised our FY2016 credit charge forecast for Bank Islam to 36 basis points (bps) from 27 bps.”

MIB Research sees BIMB’s gross NPF ratio moving up marginally to 1.2% in FY2015 and 1.3% in FY2016.

Bank Islam CEO Datuk Seri Zukri Samat, who also heads BIMB, acknowledges that the bank is likely to see slower growth this year given the more challenging economic conditions.

“This will be a challenging year. The (overall) growth will be slower than in 2015. I hope the bank will maintain double-digit growth in terms of financing performance as achieved last year,” he told reporters last month after a bank event.

Announcing its headline targets for FY2016 last month, BIMB said it aspires for return on equity (ROE) of 20% based on its profit before zakat and tax (PBTZ). This is lower than the 23% target it set for FY2015.

Analysts see it making a net profit of RM526.5 million in FY2015, which would be a 1.1% decline from the RM532.2 million it made in FY2014.

For the first nine months of FY2015, net profit came in at RM385.4 million, some 1.8% higher than in the same period a year ago. Bank Islam’s PBTZ stood at RM529.6 million, growing 4.6% year on year, while STMB’s was RM156.4 million, growing 9.8% y-o-y.

BIMB is due to announce its full-year results by the end of this month.

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