Investment Highlights

• We maintain HOLD on Bank Islam (BI) with a revised fair value (FV) of RM2.65/share from RM2.50/share after rolling forward our valuation to FY25F. Our FV is based on a P/BV of 0.8x supported by FY25F ROE of 9.3% and a neutral 3- star ESG rating.

• No changes to our net profit forecast.

• BI recorded a gross financing growth of 2.4% YoY in 1Q24, below the industry’s 6% YoY expansion. This was to manage balance sheet growth and protect net income margin (NIM). 2Q24 is likely to see a moderate improvement in financing growth from 1Q24 on the back of better traction in retail financing, supported by growth in personal financing. Meanwhile, growth in institutional (commercial and corporate) financing remained slow.

• 2Q24 NIM is seen holding up and the group is on track to meet its guidance of ≥ 2.1% for FY24F. Deposit competition persists with ongoing campaigns by banks. Nevertheless, FD rates are seen as continuing to be more rational than in late-2022 and early-2023. In the recent deposit campaigns, the larger capitalised banks are seen offering FD rates of 3.6%-3.8% for tenures of 6-12 month. In contrast, smaller Islamic banks are offering FD rates of close to 4.0% for tenures of 9-12 months.

• The mix of individual deposits and investment accounts continues to be still low at just slightly above 20%. We continue to see challenges in the funding profile of BI, which is skewed towards wholesale deposits. The group’s CASATIA ratio of more than 36% remained above the banking industry’s 31%.

• 1Q24 saw an outstanding overlays of RM62.3mil, 7.9% of the group’s expected credit loss. RM10-15mil of that amount is likely to be consumed/utilised in 2Q24.

• We expect 2Q24 non-fund-based income to be subdued amidst flattish investment income. 10-year MGS was flat at 3.86% as at end-2Q24 (1Q24: 3.85%). The group will focus on growing fees and commission income from bankatakaful, wealth management and trade financing.

• We project the C/I ratio be still elevated in the near term, higher than the industry’s 48.7%. The ratio is envisaged to gradually improve to 58.6% in FY24F and 57.5% in FY25F from 60.9% in FY23. This will be supported by the near completion of its IT initiatives and projects.

• We gather that the rebranding of Go Biz and enhancements to Go Mobile Banking are now >70% completed. Besides, IT works for the addition of features and to increase transactional capabilities of Be U, the fully cloud native digital banking app are >70% done, on track to be completed by end FY24F.

• Recall in 1Q24, BI reported a gross impaired financing (GIF) ratio of 0.95%, below the industry’s 1.62%. 2Q24 GIF ratio is likely to be marginally lower than 1Q24, underpinned by continued improvement in GIF ratio of retail financing coupled with no surprise impairments for institutional financing.

• With no adverse trend in 2Q24 (April-May 2024) stage 2 financing, we expect the group’s net credit cost to be on track to management’s guidance of <30bps in FY24F.

• BI has recently announced the issuance of RM1bil senior sukuk murabahah (tier-2 capital) with tenures of 5/7 years at rates of 4.01%/4.13% for working capital. This is envisaged to lift the group’s total capital ratio by 200bps from 19.6% to 21.6%.

• 2Q24 results are expected to be announced either on 28th or 29th Aug. With a moderate improvement in financing growth, NIM and GIF ratio holding up and an anticipated lacklustre non-fund-based income, we expect 2Q24 earnings to be moderately better than RM129mil in 1Q24.

• The stock is trading fairly at FY25F P/BV of 0.8x based on an expected ROE of 9.3% vs. industry average of 10%-11%. We continue to see its dividend yield of 7.2% as supportive of the share price.

• Foreign shareholdings of the stock decreased slightly to 4.5% as of end June 2024 vs. 4.68% in Mar 2024.

Source: AmInvest Research - 19 Jul 2024