BIMB Holdings Bhd
(Aug 29, RM4.00)
Maintain hold with a higher target price (TP) of RM4.15: Our “hold” recommendation is premised on concerns over asset quality, particularly on its personal loan portfolio, given that consumer sentiment has been weak. The consumer sentiment index stood at 78.5 in second quarter of 2016, reflecting the weak outlook in Malaysia. BIMB Holdings Bhd is also not immune to the challenges in the banking sector, including slower loan growth, sluggish capital markets and higher credit costs as recoveries have normalised.

The second quarter ended June 30, 2016 (2QFY16) earnings was within expectations. Net financing income was underpinned by strong growth in financing and an improvement in margins. Margin expansion was driven by lower cost of funds due to faster contraction in higher cost fixed deposits. Gross non-performing loans (NPL) ratio rose quarter-on-quarter (q-o-q) to 1% as absolute NPL increased 10% q-o-q. The RM34 million increase mainly stemmed from an increase in impaired loans to the manufacturing sector. Consequently, BIMB’s loan loss coverage ratio slid to 188%. That said, BIMB’s asset quality standing remains sound as its impaired loans ratio and loan loss coverage ratio remain lower than the industry average of 1.7% and 90% respectively.

BIMB has a target to achieve financing growth in the low teens (our forecast is at 12%). Management expects credit cost to be similar to the financial year 2015 (FY15) level (20 basis points), but we have conservatively assumed credit cost to inch up in FY16 to 36 basis points. BIMB is also hopeful of keeping net interest margin stable, premised on its liability management strategy. BIMB targets to achieve 20% return on equity (ROE) and 1.3% return on assets (based on profit before zakat and tax).

Our RM4.15 TP, implying 1.6 times financial year of 2017 forecast book value, is derived from the Gordon Growth Model. Our TP assumes 16% ROE, 4% long-term growth and 11% cost of equity. We expect valuation to remain range-bound amid cautiousness on its personal loan portfolio. Key risks to our view is stronger-than-expected loan growth. Our loan growth assumption has been ratcheted down in view of the softer consumer sentiment. Earnings could surprise on the upside if loan growth remains persistently strong. — Alliance DBS Research, Aug 29