BIMB likely to deliver bumper 3Q earnings

This article first appeared in The Edge Malaysia Weekly, on November 5, 2018 - November 11, 2018.
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BIMB Holdings Bhd is expected to deliver a strong set of third-quarter results on the back of robust loan growth, bucking the lacklustre earnings trend projected for banks this reporting season.

“We expect a bumper quarter from BIMB, backed by solid loan growth at Bank Islam Malaysia Bhd and stronger contribution from Syarikat Takaful Malaysia Keluarga Bhd (STM). Net profit should be up, both on a year-on-year and quarter-on-quarter basis,” a banking analyst tells The Edge.

Some 53.5% owned by Lembaga Tabung Haji, BIMB derives about 80% of its income from Bank Islam and the rest from its listed takaful player, STM. It is tentatively due to release its 3QFY2018 results on Nov 29.

The group is expected to easily meet its loan growth target of 8% this year — relatively high compared with the industry’s anticipated 5% to 6%.

According to analysts, BIMB’s management has indicated that loan growth in the third quarter trumped that in the first and second quarters combined. As at end-June, loan growth stood at 6.8% year on year.

“We expect BIMB’s loan growth in 3QFY2018 to exceed management’s guidance of 8% year on year for FY2018. We understand that demand from the group’s consumer financing segment — which accounts for about 76% of its total portfolio — is still robust, driven predominantly by mortgage and personal financing. Within the commercial segment (14% of its portfolio), growth is in line with management’s expectations of 5% to 6% year on year. However, management is sticking to its 8% year-on-year loan growth target for FY2018 as it has little visibility on 4QFY2018 [and also] given that it is a seasonally weaker quarter,” RHB Research says in an Oct 29 report.

It projects that BIMB’s net profit will grow 5.9% to RM656.2 million for the full year compared with RM619.8 million last year. At half-time, net profit stood at RM322 million, up 12.3% year on year.

In the second quarter, all public-listed banks, bar Malayan Banking Bhd, AMMB Holdings Bhd and Alliance Bank Malaysia Bhd, saw a decline in quarter-on-quarter earnings mainly because of a slowdown in lending — the result of uncertainties brought about by the change in government on May 9 and weaker capital market-related activities.

Analysts expect the outlook for banks to remain challenging, with most maintaining a neutral stance on the sector.

BIMB, however, is likely to outperform on the earnings front.

On Oct 25, its 59.6%-owned subsidiary, STM, announced robust third-quarter earnings that beat analysts’ expectations by a mile. Net profit, at RM82.8 million, was 71.7% higher year on year — the largest quantum of increase seen in three years — and 65.7% higher quarter on quarter, boosted by strong growth in its family and general takaful businesses.

This propelled its nine-month net profit to increase 35.5% to RM202.5 million, accounting for 88.9% of the street’s consensus forecast for the full year. Analysts have since raised their full-year earnings forecast.

“We are revising up our FY2018 and FY2019 forecasts [for STM] by +7.5% and +6.7% [respectively], given that the results were above our expectations. This is taking into account the continued momentum in its family and takaful businesses,” MIDF Research says in an Oct 26 report.

BIMB’s share price, which has shed 21.8% this year to hit a 34-month low of RM3.44 on Oct 25, started moving up the day after STM released its 3QFY2018 results on investor expectations that BIMB will benefit from STM’s bumper results. Last year, STM accounted for 19% of BIMB’s net profit.

Is there more upside for the stock? Bloom­berg data shows that of eight analysts who track the counter, six have a “buy” call and the rest, a “hold”. Their consensus one-year target price of RM4.81 implies a nearly one-third upside from its last traded price of RM3.65 last Thursday.

BIMB shares were thinly traded on Thursday as sentiment in the stock market turned cautious ahead of the unveiling of Budget 2019 the next day. A mere 600 shares changed hands.

Trading at a price-earnings ratio of 9.3 times, BIMB is one of the cheapest banking stocks currently.

However, an issue that continues to hang over the stock is a possible restructuring of the BIMB group. This is likely to involve the transfer of BIMB’s listing status to its wholly-owned subsidiary, Bank Islam, and a possible rights issue to repay a shareholder debt of RM1.3 billion. BIMB has said it is still evaluating restructuring options.

Some investors are concerned that STM, a strong profit contributor, may be sold as part of the restructuring exercise. Sources close to BIMB, however, indicate that this will not be the case. “BIMB has options that do not involve the sale of STM,” one tells The Edge.

Without a restructuring, BIMB, as a financial holding company (FHC), will need to meet certain capital requirements by next year. It is understood that capital adequacy rules for banks under Basel III will extend to FHCs in 2019.

Apart from Tabung Haji, the Employees Provident Fund is also a substantial shareholder of BIMB, with a 12.75% stake.

Interestingly, the group has yet to appoint new leadership following Khairul Kamarudin’s resignation as CEO of both BIMB and Bank Islam on July 20. BIMB’s day-to-day operations are overseen by a board executive committee. Over at Bank Islam, chief financial officer Mohd Muazzam Mohamed is the acting CEO.

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