BIMB Holdings Bhd
(Oct 13, RM4.25)
Downgrade to neutral from buy with target price of RM4.70: We met BIMB recently with a group of investors and understood from management that the Islamic banking environment is facing rising deposit costs, challenges in deposit-taking and regulatory uncertainties over capital requirements.
Upcoming hurdles from the implementation of the Islamic Financial Services Act by July 2015 could complicate the bank’s ability to retain depositors, as customers can choose to take up investment/equity risks via investment accounts (IA).
IA may complicate its Bank Islam subsidiary’s recognition of financing-to-deposit ratios. There are also no updates yet on off-balance sheet accounting. We think these uncertainties offset the prospects of IA, which were unveiled in the 2015 Budget speech, as the exact method of implantation and customer reception is unclear.
Accordingly, we revise our FY14F/FY15F earnings per share (EPS) downwards by 2%/4% respectively. Our main adjustment is on net interest margin (NIM) projection to 2.6% from 2.7%. We previously factored in rising funding costs and regulatory hiccups, but with NIM stabilising to 2.7% on BIMB’s asset growth strategy in high-yielding portfolios mix. Management now expects a further 10 basis points reduction in net financing margins on the pre-emptive hike in deposit rates and the continuous challenge in offering competitive financing products. We expect BIMB’s financing growth to be in line with our 17% assumption, with asset quality to remain stable.
Downgrade to neutral with sum-of-parts valuation of RM4.70 from RM5.05, at an implied 1.8 times price-to-book value. Our target price adjustment is from Bank Islam’s revised book value and on an update in Syarikat Takaful Malaysia Bhd’s stake to 60% from 61%. We see long-term value in the stock, being a quality bank with above-industry growth and as a standalone domestic Islamic financial institution. Yet, near-term upside is capped by the aforementioned uncertainties.
Bank Islam’s plans to expand into Indonesia are also on hold given the uncertainties about foreign participation there. Risks could entail a high deposit run-off rate, though we believe there will be criteria for customers to qualify for IA. — RHB Research, Oct 13
This article first appeared in The Edge Financial Daily, on October 14, 2014.