Investment Highlights

• We maintain BUY on Bank Islam (BI) with an unchanged fair value (FV) of RM3.10/share. Our FV is based on FY23F ROE of 9.4%, leading to a P/BV of 1.0x. No change to our neutral 3-star ESG rating.

• We fined-tune our FY22F/23F earnings post-2Q22 results briefing by -0.4%/+1.7% after tweaking our CI ratio and credit cost assumptions.

• Management provided an update on its 6MFY22 results. Recall, the group’ 6MFY22 core earnings fell by 29% YoY to RM249mil due to lower non-fund based income and higher allowances for financing loss.

• Even though fees and commission income rose in 6MFY22, its non-fund based income declined by 53% YoY due to market volatility which saw revaluation losses (RM27mil) on unit trust funds and forex losses (RM12mil) from its Labuan operations.

• BI’s gross financing grew 8% YoY in 2QFY22, supported by its consumer portfolio which expanded by 10%. Loan momentum remains strong, which could lift its gross financing growth to be higher than 10% YoY in FY22.

• Opex grew 8% YoY in 6MFY22. The increase was driven by higher personnel cost from investments in digital infrastructure as well as general expenses. With phase 2 of an IT expansion to improve its banking propositions, opex will be higher in FY22 compared to the preceding year.

• Owing to a lower top line and higher expenses, CI ratio for 6MFY22 climbed to 59.3%. Nevertheless, management is guiding for a CI ratio of 58% for FY22 in anticipation of an improved top line in 2H22. This will still be higher than the BAU CI ratio of 55–56%.

• Excluding modification loss, net income margin (NIM) in 2QFY22 slipped 1bps QoQ to 2.29%. YTD, underlying NIM fell by 9bps to 2.29% for 6MFY22 due to lower yields on the group’s investment portfolio. The group monetised its FVOCI securities to reinvest in shorter term securities which are lower yielding. This had offset the improvement of its financing yield.

• Management hinted for its NIM for FY22 to be >2.3% based on the sensitivity of an uplift to financing yield of 5–8bps for every 25bps change in the OPR.

• BI’s gross impaired financing (GIF) ratio rose to 1.1% in 2QFY22 due to impairment of loans to companies in consumer goods and trading. The group is confident of keeping the ratio below 1.5% for FY22. It has a low delinquency ratio of 0.97%.

• Credit cost for 6MFY22 of 25bps was within the 35bps guided for FY22. Management has lowered its guidance to 30bps.

• The group’s overlays have decreased by 46% YTD to RM181mil due to allocation to specific financing accounts following the deterioration of asset quality. We gather that a portion of the overlays has been consumed for borrowers in oil & gas sector and for certain SME and corporate loans.

• Financing under repayment assistance was <5%.

• On ESG, BI has mobilised RM2.6bil in green financing and planned to increase it by 2x over the next 2 years.

• The group is monitoring closely on the asset quality of its SME portfolio. On a comforting note, most of its SME financing is well collateralised.

• The group has a healthy liquidity position with LCR of 174% and net stable funding ratio of 110%.

• The stock continues to trade at an attractive valuation of FY23F P/BV of 0.8x with a decent dividend yield of 6%. It remains one of the pure full-fledged financial services providers listed on the exchange.

Source: AmInvest Research - 2 Sept 2022