This article first appeared in The Edge Malaysia Weekly on April 20, 2020 - April 26, 2020

THE Covid-19 crisis has thrown a major spanner in the works for BIMB Holdings Bhd’s group restructuring plan.

The restructuring, which entails BIMB’s transferring of its listing status to its wholly-owned subsidiary Bank Islam Malaysia Bhd, was expected to be completed by this August. This will now be delayed to the final quarter of the year or the first quarter of 2021, its CEO Mohd Muazzam Mohamed says.

“We have submitted the corporate exercise proposal to Bank Negara Malaysia; however, in view of the ongoing Movement Control Order, we anticipate a response possibly in May. Nevertheless, we understand that this is an unprecedented predicament, hence, decisions are, of course, subject to the duration of the MCO,” Muazzam, who is also CEO of Bank Islam, tells The Edge.

He says the group is also mindful that the stock market is a bear market now, with the benchmark index FBM KLCI having declined over 20% since it touched a peak of 1,895.18 points in April 2018. The index closed at 1,407.34 last Friday.

“Therefore, barring any further unforeseen circumstances or hiccups, we can endeavour to complete the exercise within 4Q2020 or 1Q2021,” he adds.

BIMB, controlled by Lembaga Tabung Haji (TH), had on Dec 11 last year announced a series of proposals for its restructuring. The transfer of its listing status to Bank Islam — a move the group had been mulling  for more than four years — is to be effected through a share swap.

But prior to the transfer, BIMB has to undertake a private placement of new shares to raise RM800 million to fully settle outstanding sukuk held by TH, which is why it needs to keep a close eye on the stock market performance. Post restructuring, Bank Islam and Syarikat Takaful Malaysia Keluarga Bhd, of which BIMB owns 59.5%, will be two separate listed entities.

Prior to the Covid-19 pandemic, Muazzam had expected the book building for the private placement to be done in March or April, and for all the corporate proposals to be completed by August.

According to Muazzam, BIMB’s direct exposure to Covid-19 tourism-related sectors, such as hotels, restaurants, travel agencies, airlines and transportation, is “very small, at less than 1%” of its financing portfolio.

“Having said that, we are mindful of the economic impact of ­Covid-19, including the impact of the MCO, that could be broad-based and across all sectors. Nevertheless, the recent relief programmes offered under the economic stimulus package and the measures introduced by Bank Negara to assist customers affected by [the pandemic] should help to cushion the impact,” he says.

As for its offer of an automatic six-month moratorium on financing repayment to retail and small and medium enterprise customers, he says the number of customers that are opting out is increasing daily. According to CGS-CIMB Research’s estimates, about 76.3% of BIMB’s total financing is eligible for the moratorium, with 74.1% from consumers and 2.2% from SMEs.

“It has been less than two weeks [since the moratorium took effect on April 1] and, so far, we have seen  more or less 5% of the total number of our retail and SME customers opting out. Numbers are still inching up as we speak, as we closely monitor the movement on a daily basis,” Muazzam says.

He sees the bank’s impairments for financing going up this year but does not expect them to be significant. He notes that the industry’s impaired ratio stood at 1.5% as at end-2019, and Bank Negara’s stress test suggests a range of post-shock impairment impacts on the ratio, ranging from 2.8% as the baseline scenario to 7.2% for adverse scenarios.

“Our track record shows that Bank Islam has maintained its asset resiliency below the industry average for almost a decade, and even below 1% in the past two years. As such, we do not envisage the uptick to be too significant this year, [and] well within industry baseline projections,” he says. Its gross impaired financing ratio was a solid 0.86% as at end-2019.

Analysts have voiced concern that further cuts to the overnight policy rate this year will reduce the bank’s margins even more as it has a high proportion of floating-rate financing. Bank Negara has already cut the OPR twice this year, by a total of 50 basis points, to 2.5%.

“OPR cuts will potentially cause a drag on Bank Islam’s and the banking industry’s earnings. The bank’s floating-rate financing comprised 91% of total gross financing as at end-December 2019. We are seeing a bearish FBM KLCI now; understandably, [as] earnings visibility is less clear, especially for banks, oil and gas, plantations and telecommunications, which are the main sectors in the [index],” says Muazzam.

He adds: “The bank’s net interest margin will inevitably be compressed in the near term. Assuming a further 50 bps cut with effect from May 2020, the bank’s NIM could be compressed further, yet be sustained above the 2% level [from 2.44% in 2019].”

Strongest financing growth

An edge that BIMB has over its rivals is its strong financing growth, which analysts say will likely continue to be better than the industry’s. Last year, the bank’s financing grew 8.1%, way ahead of the industry’s loan growth of 3.9%.

“Bank Islam can expect some moderation from the 8% growth in 2019 to at least 5% growth in 2020; yet, we will continue to stay cautious,” says Muazzam, who notes that there is a possibility of an economic recession this year.

As for dividends, he indicates that payouts could be lower going forward, given the difficult times.

“Dividend payouts for banks depend on profitability, liquidity, capital and the economic outlook. Given that 2020 is going to be a challenging year, the banking industry may need to put its priority on sustainability and capital preservation. Hence, yes, lower dividend is a possibility to ensure that the long-term sustainability of a bank is preserved.”

He notes that Bank Islam has in place a dividend reinvestment plan. “This way, we have the flexibility and ability to declare dividends while maintaining the capital of the bank. Having said that, it is worth noting that dividends by banks will require approval from Bank Negara.”

BIMB’s net profit stood at a record RM786.9 million in 2019, a 15.4% increase year on year. It declared a higher dividend of 16 sen a share, after 15.5 sen in the previous year.

BIMB is currently a “buy” at Maybank Investment Bank Research (target price: RM4.30) and RHB Research (RM3.90), and a “hold” at CGS-CIMB (RM3.41). The stock, which has shed 24.6% over a year, closed at RM3.40 last Friday.

“We retain our ‘hold’ call on BIMB as we expect the margin erosion from the OPR cut in 2020 to be partially offset by its loan growth of 3.9%, [which we expect to be] the strongest in the sector. In addition, its loan loss coverage was also the highest among peers at 173.5% at end-2019, and way above the industry’s 89.4%. This would provide a cushion against any hike in its gross impaired loans. Its valuations are also reasonable, as its estimated 2020 price-to-book value of 0.9x is two standard deviations below the 5-year average of 1.4,” says CGS-CIMB in an April 15 report.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.