Investment Highlights

• We maintain BUY on Bank Islam (BI) with a revised fair value (FV) of RM2.50/share from RM2.20/share after rolling over our valuation to FY24F ROE of 9%, leading to a P/BV of 0.8x. No change to our neutral 3-star ESG rating.

• We have made no changes to our earnings forecast.

• Recall in 1Q23, the group’s net income margin (NIM) was compressed by 22bps YoY to 2.06%. This was contributed by the increase in funding cost following stiffer deposit competition in 4Q22 and early 2023 with the market anticipating OPR hikes.

• BI continues to focus on managing cost of funds to improve net fund based income.

• We expect the group’s NIM to improve in 2Q23 based on: i) better asset yield contributed by the 25bps increase in OPR to 3% in May 2023, and ii) lower funding cost.

• With an LCR of 171%, higher than BI’s comfortable level of 135-145%, we see room for improvement on funding cost by lowering LCR aside from releasing more expensive deposits.

• Amidst a more stable 10-year MGS yield recently, we do not foresee unrealised losses on its unit trust investments in the corresponding period last year to be repeated in FY23F. Our economics team expects the 10- year MGS yield to be 3.75% by the end of 2023. Thus, with the expectation of a gradual lowering of the yield, opportunities lie ahead for potential monetisation of the group’s investment securities. This will be supportive of its non-fund based income.

• Overall, an improved net income (net fund based + non fund based income) is expected to see a lower cost to income (CI) ratio in 2Q23 vs. 61.5% in 1Q23.

• Operating expenses will remain elevated in the near term due to information technology (IT)-related expenses. We continue to expect investments to be made to improve the group’s IT infrastructure and digital capabilities. 2Q23 will likely see expenses related to the collective agreement adjustments booked in albeit lower than 1Q23. This should complete personal cost adjustments of unionised employees for the year.

• We gather that delinquency rates have stabilised across the retail (consumer & SME) and institutional banking (corporate & commercial) segments. With that, we expect an improvement in BI’s gross impaired financing (GIF) ratio in 2Q23 from 1.37% in 1Q23.

• From recent media announcements, the Ministry of Health (MOH) has renewed Pharmaniaga’s contract for medical supply logistics services for another 7 years from 1 July 2023 to 30 June 2030. This is expected to look more favorable on the group and BI is likely to avert any impairments of its financing to Pharmaniaga.

• We expect the group’s credit cost in 6M23 to be within management’s guidance of 30-40bps for FY23. No lumpy provisions on impairments of any corporate financing are expected.

• Management overlays are not anticipated to be much changed from RM123.6mil in 1Q23 with the outstanding amount still above RM100mil. Moving forward, a portion of management overlays could be reallocated to cover macroeconomic variabilities.

• Management guidance for FY23 is unchanged. The group continues to guide for: i) ROE of 7-8% based on profit after tax, ii) loan growth: 7-8%, iii) NIM: 2.2%, iv) credit cost: 30- 40bps, and v) CI ratio: <60%.

• For the upcoming 2Q23 results to be announced in Aug 2023, we expect earnings of BI to be better QoQ compared to RM118.1mil in 1Q23. This will be underpinned by the improvement in NIM and stabilisation of delinquency rates across all financing segments which are unlikely to see any negative surprises to provisions.

• The stock continues to trade at an attractive valuation of FY24F P/BV of 0.7x, well below its 5-year average of 1.5x with a compelling dividend yield of 8%.

Source: AmInvest Research - 21 Jul 2023