Can BIMB maintain its growth?

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BIMB HOLDINGS BHD, which derives the bulk of its earnings from its Islamic banking subsidiary Bank Islam Malaysia Bhd, fared decently in the last financial year despite a tough operating environment.

The question investors are asking is whether it can maintain its growth momentum this year even as business and competition get tougher amid an anticipated slower economy.

While BIMB itself is cautiously optimistic that it can, analysts say the group’s growth is likely to be less robust this year and the next.

They expect BIMB’s gross financing growth, which stood at a solid 24.2% in the year ended Dec 31, 2014 (FY2014), to slow to teen growth this year on softer consumer sentiment, even as pressure on its net financing margin (NFM) — at 2.69% last year — escalates.

As it is, Bank Islam is on a “defensive” strategy this year, which basically means it is tightening its financing criteria in a bid to preserve its asset quality.

“I like this strategy, but it also means you can’t see as much earnings growth from loans. The good thing, however, is that its asset quality will remain good. I don’t expect to see a big jump in provisions. It’s actually considered a good bank in terms of asset quality,” an analyst that tracks BIMB tells The Edge.

Another analyst, RHB Research’s analyst Kong Ho Meng, says in a report on BIMB (fundamental: 2.7; valuation: 1.8) last week: “We are sanguine on its defensive strategy to tighten financing criteria that could moderate its growth.”

BIMB’s FY2014 net profit, at RM532.2 million, came in marginally ahead of analysts’ expectations – it accounted for about 104% of consensus estimates.

The net profit was a significant 90.6% jump from the previous year’s RM279.3 million, reflecting the maiden year of contribution of BIMB’s 100% stake in Bank Islam. BIMB had previously owned just 51% of Bank Islam. (It acquired the remainder 49% in December 2013.)

Profit before zakat and tax (PBZT) however was 0.5% lower at RM815.4 million, mainly due to a RM68.2 million financing cost of the sukuk that BIMB raised to partly fund the acquisition of the remainder 49% stake in Bank Islam.

BIMB’s Islamic banking business’ PBZT grew 3.8% to RM702.8 million, accounting for 86.2% of BIMB’s profit.  

BIMB’s takaful business, operated under 61%-owned Syarikat Takaful Malaysia Bhd, saw PBZT grow 8.3% to RM188 million. The operating revenue of the takaful business however fell 3.5% to RM1.65 billion, mainly due to lower sales generated by the family takaful business.

BIMB’s asset quality, as measured by gross impaired financing ratio, improved to 1.14% from 1.18% a year earlier. It was better than the industry’s 1.66%.

Bank Islam’s key performance indicators also compared favourably against the industry’s. Its pre-tax return on equity (ROE) stood at 19.9% against the banking system’s 15.2%, while pre-tax return on assets was 1.6% against the system’s 1.5%. It has guided for a minimum pre-tax ROE of 23% this year.

Its ratio of current account and savings account deposits to overall deposits was 38.1%, which was higher than the banking industry’s 25.6%.

Commenting on its Islamic banking prospects in the notes in its 2014 financial accounts, BIMB says Bank Islam will enter the final phase of its 2013-2015 corporate plan. “It is expected to sustain its growth momentum, albeit with a cautious stance, taking into consideration the current economic condition.

“One of the bank’s defensive strategic priorities is to broaden the existing relationships and retain the good clients. To preserve sound asset quality, it plans to continue exercising vigilance in its underwriting standards as well as take proactive measures in its collection and rehabilitation of financing payments.”

It also says the bank will continue to expand its branch network, with an aim to hit the “optimal” number of 150 branches by end-2015. It has about 140 now.

“Although overall loan growth remained strong, we still believe softer consumer sentiment will slow growth going forward. We cut our FY2015-2016 earnings forecast by 5% to 6% on the back of sustained pressure on NFM and higher provisions. Our FY2015 loan and deposit growth assumption stands at 15% and 10% respectively,” AllianceDBS Research says in a March 16 report.

Last year, deposits grew by 10.2% to RM40.7 billion.

As it is, analysts expect Bank Islam’s personal financing (PF) growth to slow down further this year. Last year, growth in PF slowed to 15.3% from a much more robust 26.1% in 2013 and 74.5% in 2012. The moderation in growth has been mainly due to the stricter lending guidelines imposed by the central bank in June 2013 to manage high household debts.

AllianceDBS maintained its “hold” call on BIMB’s stock but lowered its target price by 40 sen to RM4.10 after it cut its earnings forecast for the group. The research house said it sees little rerating catalysts for the bank as Bank Negara Malaysia’s recent tightening measures on consumer loans could dampen loan growth.

Bloomberg data shows that of at least seven research houses that track BIMB’s stock, all except one had a “hold” call on it, with the average 12-month target price coming in at RM4.26. This implies a 26 sen upside from its closing price of RM4.00 last Thursday.

Kenanga Research, meanwhile, had an “outperform” call and a RM4.72 target price.

“Despite negative headwinds surrounding the banking sector, we like BIMB for its decent yields of around 5%. Also, it is the only listed shariah-compliant banking stock on Bursa and hence, is able to demand a scarcity premium from the market,” Kenanga Research says in a report last week.

It nevertheless sees BIMB’s financing growth slowing to 8% this year. It also says under a rising inflation environment, default rates may climb and exert pressure on asset quality.

“We foresee escalating NFM pressure given stiff price-based competition for financing and deposits in the market, plus the bank will have to reclassify its Mudarabah and Wakalah-based demand deposits to become investment accounts. All in, we have factored in a NFM decline of four basis points for FY2015,” the research house says.

On market talk that Bank Islam may be merged with rival Malaysia Building Society Bhd, RHB Research’s Kong says in a report that such a merger would need more justification as there are likely to be few synergies apart from cost synergies and having a greater foothold in PF.

There was a leadership change last month in BIMB, which is 55% owned by Lembaga Tabung Haji. Effective Feb 18, Bank Islam’s managing director Datuk Seri Zukri Samat became BIMB’s new group CEO, replacing Datuk Johan Abdullah who resigned after being in that role since May 2008.

Zukri, who has over 20 years of banking experience, continues to be the MD of Bank Islam.

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This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.