9MFY24 earnings slightly missed expectations on a weaker 3QFY24 net profit with a flattish income, higher finance cost and allowance for financing impairment. This led to a low ROE of 7% for 9MFY24. Valuation wise, we continue to see the stock trading at a fair FY26F P/BV of 0.8x with a balance risk and reward. Expenses on digital will remain elevated due to IT enhancements. The group has launched a new mobile app, Go Mobile Banking and Bank Islam Internet Banking in 4QFY24. C/I ratio is expected to remain higher than the industry's 46.3% in the near term. Dividend yield of 6.8% in FY25F and 7.6% in FY26F seen as supportive of share price. Application for a payout of interim dividend has been submitted to the authorities for approval. We maintain HOLD on Bank Islam (BI) with an unchanged TP of RM2.90/share pegging the stock CY26 P/BV of 0.9x supported by ROE of 9.5%. Our TP implies a neutral 3-star ESG rating.

• Earnings slightly below expectations. 9MFY24 net profit of RM397mil (+0.8% YoY) were slightly below expectations, accounting for 67% of our forecast and 68.1% of consensus' estimate. The variance was largely due to a lower-than-expected fund based and non-fund-based income. Net fund-based income grew modestly by 4.9% YoY supported by financing growth and income from investment securities. QoQ earnings declined by 4.9% with a flattish net income, higher finance cost and allowances for financing impairment. Our earnings estimate for FY24F have been lowered slightly by 3.4% to account for a lower income derived from shareholders' funds.
• BI's gross financing growth remained slow at 1.7% YoY contributed by contraction in corporate financing, growing below the industry's 5.6% YoY. NIM fell in 3QFY24 by 9bps QoQ in 3QFY24 due to issuance of sukuk securities and redemptions of corporate financing. 9MFY24 NIM of 2.15% was higher by 4bps YoY compared to 9MFY23. In 4QFY24, we expect further pressure on NIM as cost of funds are likely to be impacted by the year-end deposit competition.
• 9M24 CI ratio stayed elevated at 63.4% due to a negative JAW of 10% YoY. Operating expenses grew 7.9% YoY outpacing growth in net income of 2.1% YoY. This was due to the group's continued investments in digital and IT initiatives for future growth. The group is embarking on a 3-year (2024-2026) cost reduction and improvement in operating efficiency program with a targeted cumulative cost reduction of RM100mil. This will be through: i) realignment of business and operation functions, ii) branch operations optimization and iii) automation of backend processes to gradually lower its CI ratio.
• Slight increase in gross impaired financing ratio (GIFR) to 1.02% with a rise in gross impaired financing balances by 11.2% QoQ to RM698mil, QoQ saw higher impaired loans to the wholesale & retail trade, hotels & restaurants, finance, insurance, business activities and household sector. As a result, financing loss coverage fell to 149.6%. GIFR remained below the industry's 1.5%. 9M24 credit cost of 22bps (9M23: 33bps) was within management's guidance of <30bps for FY24F.

Source: AmInvest Research - 2 Dec 2024