Investment Highlights

• We maintain BUY on Bank Islam (BI) with a revised fair value (FV) of RM3.20/share from RM3.10/share. Our FV is based on a higher FY23F ROE of 9.8%, leading to a P/BV of 1.0x. No change to our neutral 3-star ESG rating.

• We raise our FY22F/23F/24F earnings post-3Q22 results briefing by +6.5%/+4.1%/+8.5% after lowering credit cost assumptions.

• In 3QFY22, the underlying net interest margin (NIM) excluding the impact of modification loss rose by 8bps QoQ to 2.37%, contributed by higher financing volume and OPR hikes. In 9M22, the group’s NIM stood at 2.33% in line with management’s FY22F guidance of >2.3%.

• CI ratio in 9MFY22 of 58.8% was in line with the CI ratio guidance of 58% for FY22F. This was higher compared to 9MFY21 of 54.2% due to the need to invest in IT and staff for digital initiatives.

• The group is now in the 2nd phase of its 4-year IT blueprint projects. BI has completed various risk assessments to strengthen cyber security. We understand that the IT spend in 2023 will be more than RM200mil. IT expenses include the strengthening of infrastructure to deliver a better experience for customers. Hence, due to the need to invest in IT, the group’s CI ratio is likely to remain elevated in the near term.

• The gross impaired financing (GIF) ratio rose to 1.2% while the ‘past due but not impaired’ loan (PDNI) ratio increased to 1.05% in 3QFY22, contributed by retail financing.

• The group’s management overlays have reduced from RM181mil in 2QFY22 to RM144mil in 3QFY22 as a portion of it has been allocated for some financing accounts. Management intends to maintain the overlays moving into FY23. Hence, reversals of the overlays are unlikely in FY22 despite financing under repayment assistance decreasing to <1%.

• 4QFY22 earnings are expected to be higher compared to 4QFY21 due to the non-repeat of a lumpy provision related to 1 corporate financing account.

• On ESG, BI has mobilised RM2.95bil in green financing as at end-Sept 2022. On social financing under Sadaga House, a charity crowdfunding platform, total disbursements have exceeded RM7mil. Meanwhile, on micro financing, the disbursements for Bangkit programme surpassed RM2.5mil while that for iTEKAD programme have exceeded RM1.5mil.

• The financial transaction volume and active users of various digital channels (Go Mobile, internet banking and Go Biz) have increased.

• The group has a healthy liquidity position with LCR of 180%, higher than the banking sector’s 141% and a net stable funding ratio of 108.7%. Its financing to available fund ratio stood at 75.9%.

• 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 Dec 2022